Some pension savers may have unwittingly exceeded a tax allowance and could now face a higher bill, figures suggest. According to HMRC data, the number of people exceeding the Annual Allowance increased by almost 20% in 2021/22 when compared to just a year earlier.

The HMRC figures show more than 53,000 people contributed more to their pension than the Annual Allowance in 2021/22. They may unexpectedly pay more Income Tax as a result. 

A pension is a tax-efficient way to save for your retirement. However, it’s important to be aware of the Annual Allowance and how exceeding it could mean you’re liable for more Income Tax than you expect. Read on to find out what you need to know. 

The pension Annual Allowance is up to £60,000 in 2023/24

When you place money into a pension, you receive tax relief. This means some of the money you’ve paid in tax goes into your pension to encourage you to save for your future. Tax relief is usually based on the rate of Income Tax you pay.

If you’re a basic-rate taxpayer, your pension provider will generally claim the tax relief on your behalf. If you’re a higher- or additional-rate taxpayer, you’ll need to complete a self-assessment tax return to claim the full amount you’re entitled to. 

The Annual Allowance covers all contributions going into your pension, including those made by your employer or other parties. The Annual Allowance is the limit for tax-efficient contributions, and you typically receive tax relief on contributions up to this threshold.

For most people, the pension Annual Allowance is £60,000 in 2023/24. However, you can only receive tax relief up to 100% of your annual earnings. 

There are some circumstances where your Annual Allowance may be lower:

• If you have already taken an income from your pension, you could be subject to the Money Purchase Annual Allowance (MPAA). For the 2023/24 tax year, the MPAA is £10,000.
• High earners may be affected by the Tapered Annual Allowance. In 2023/24, if your “adjusted income” – your total income including money you and your employer contribute to your pension – is above £260,000, your Annual Allowance will fall by £1 for every £2 it exceeds this threshold. The maximum reduction is £50,000. So, if your adjusted income is £360,000 a year or more, your Annual Allowance would be £10,000. 

If you’re unsure if you’re affected by the MPAA or Tapered Annual Allowance, please contact us. 

It might also be useful to keep in mind that you can carry forward unused Annual Allowance for up to three years, after which it is lost. So, keeping track of your pension contributions for each tax year could help you save more tax-efficiently into your pension. 

You could face a tax charge if you exceed the Annual Allowance

If you exceed the Annual Allowance, you will be faced with a charge – the amount contributed to your pension that is above the Annual Allowance will be added to your other taxable income. As a result, your Income Tax bill might be higher than you anticipate. 

In some cases, you may be able to ask your pension scheme to pay the charge from your pension. This means your income wouldn’t be affected but the value of your pension would be reduced. However, this isn’t always an option. 

If you’ve unwittingly exceeded the Annual Allowance, it may be worth reviewing your pension contributions for previous tax years. You may be able to reduce or avoid a tax charge by carrying forward unused allowances.  

A financial plan could help you avoid unexpected tax bills

Keeping track of your pension contributions can be difficult. After all, they’re often deducted from your income automatically, and you might want to make additional contributions too. So, it could be easier than you think to accidentally exceed the threshold.

A financial plan may help you manage your tax liability and avoid a potential charge by setting out your contribution plans. Reviewing your plan regularly can help you factor in changes to your circumstances, such as the effect of a higher income or using a lump sum to boost retirement savings. 

Not only that, but a financial plan could also help you align your pension with your retirement plans. 

It’s not just the Annual Allowance you need to keep in mind to get the most out of your pension and reach your retirement goals, either. You might also want to consider what income your pension could deliver in retirement, how it’s invested, and whether you’re claiming all the tax relief you’re entitled to.

We can work with you to create a retirement plan that suits your circumstances and aspirations, including how to use your pension to save tax-efficiently. 

Please contact us to arrange a meeting to talk about your goals and how you may use your assets to reach them. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  

The Financial Conduct Authority does not regulate tax planning.