Guide Annual allowance

The annual allowance is the maximum amount of pension savings an individual can have each year that benefit from tax relief. In practice, an individual is subject to a tax charge (the annual allowance charge) where their pension savings exceed their available annual allowance for a tax year.

There is nothing to stop an individual paying in more than their available annual allowance. An annual allowance charge would be payable on the excess, but they would still be able to claim tax relief on all their personal and third-party contributions up to the higher of 100% of their relevant UK earnings and £3,600 per annum. The annual allowance tax charge will probably negate most (if not all) tax relief on the excess above the annual allowance. Current and past annual allowance limits are listed below:

*Special transitional rules applied for 2015/16. See this HM Revenue & Customs' (HMRC) guidance for full details:  https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm058000

To calculate if an individual has exceeded the annual allowance for a tax year you need to know the ‘total pension input amount’ in the pension input period (PIP). Pension input amounts are calculated in different ways for different types of pension schemes.

The PIP is the period over which the benefits accrued under a defined benefit scheme or contributions paid by or on behalf of a member under a defined contribution scheme are calculated. Since 6 April 2016, PIPs have run in line with tax years.  

Further information can be found here.

Generally, the pension input amount for a money purchase arrangement is the total of all contributions paid by the member, their employer or a third party on the member’s behalf to the arrangement during the PIP.  Personal contributions, including third-party contributions, don't count towards the pension input amount if paid after the individual reaches age 75 - such contributions don't qualify for tax relief.  However, employer contributions paid in respect of over-75s do count.

For defined benefit arrangements, the pension input amount is calculated as the increase in the value of the accrued benefits over the PIP. In simplistic terms, the increase in value of accrued benefits is worked out by subtracting the ‘opening value’ of benefits from the ‘closing value’. The opening value is calculated as the annual pension at the last day of the immediately preceding PIP x 16, then uprated in line with the Consumer Price Index (CPI). The closing value is the annual pension at the end of the PIP x 16. The opening value is nil for the first PIP.

The CPI figure that should be used for the purpose of calculating pension input amounts and carry forward amounts for defined benefit arrangements is the annual increase in the CPI for the month of September for the previous tax year.  

HMRC’s Pensions Tax Manual provides further information on calculating pension input amounts under defined benefit arrangements in more complex situations. See:

It's possible to carry forward unused annual allowance from the previous three tax years. This can only be done if an individual first uses up the full annual allowance in the tax year they want to carry forward to.

The use of carry forward allows occasional large amounts of pension savings to be made and may be of use to the self-employed, to employees approaching retirement or those that have received a redundancy payment. Any carry forward amount can be added to the current year’s annual allowance to give an individual a higher annual allowance. More information can be found in the ‘Carry forward ’ section of this guide. 

An individual should only need to pay an annual allowance charge if the total pension savings made by them, their employer or a third party on their behalf are more than the annual allowance for the tax year plus any available carry forward amount. The responsibility for working out if an annual allowance charge may be due falls on the individual.

It isn’t possible for a member to request a refund of contributions just to avoid an annual allowance charge. If a contribution is refunded or unapplied for this reason, the contribution is likely to be an unauthorised payment.

There are situations when pension savings will not be tested against the annual allowance even though the annual allowance may have been exceeded. These are:

• death,
• serious or severe ill-health,
• deferred members. 

More information on this can be found at:

Pension savings statements are designed to help people keep track of their pension savings. Where certain conditions apply, a scheme administrator is required to automatically issue a pension savings statement to a member. For a money purchase scheme (such as a personal pension or stakeholder) this would be where an individual has been an active member for all or part of the PIP and where:

• Their total pension input amounts under all arrangements under the scheme are more than the annual allowance for the tax year, or
• The scheme administrator believes the individual has flexibly accessed a money purchase arrangement and their pension input amounts under the scheme are more than the MPAA

A pension savings statement will confirm the pension input amount for the tax year in question and the previous three tax years. In general, an automatic statement should be issued by 6 October following the end of the relevant tax year.

Where there is no automatic right to a pension savings statement, it is possible for an individual to ask a scheme administrator to issue one. Collecting information on pension savings for every registered pension scheme an individual is a member of will allow the individual to assess whether they have a liability to pay an annual allowance charge. Scheme administrators have until the later of three months from the date of receipt of a request and 6 October following the end of the relevant tax year to issue a statement requested by the member.

Scheme administrators must report details of any compulsory pension savings statements they have issued to HMRC via an event report. The event report must be made for the tax year in which the pension savings statement is actually issued to the member. The event report is, therefore, likely to be for a later tax year than the tax year for which the pension savings statement relates. 

For example, assume a member exceeds their annual allowance for the 2023/24 PIP. The scheme administrator should have issued a pension savings statement for 2023/24 automatically by 6 October 2024.  Even though the pension savings statement is for the 2023/24 tax year, the event report is based on the issuing of the pension savings statement. The scheme administrator in this case must notify HMRC in an event report for 2024/25 that a pension savings statement for 2023/24 was issued to the member. The latest date the event report can be made is 31 January 2026.

More information on pension savings statements can be found here.

This covers the pension savings statements requirements for the annual allowance and for the MPAA.

If an annual allowance charge is due, the individual needs to complete a self-assessment tax return to detail the amount by which their total pension savings exceeds the annual allowance, including any carry forward amount. For an online tax return, the tax charge due will be calculated automatically.

The tax charge is calculated by adding ‘reduced net income’ to the excess pension savings and then assessing the level of tax due on the excess amount. Reduced net income is broadly the amount an individual pays tax on for a tax year (taxable income less personal allowances). If a scheme administrator is paying some, or all, of a charge under ‘scheme pays’, the tax charge should be included on the scheme’s Accounting for tax return. The member must also include details of the charge on their self-assessment form, including any amount the scheme is paying. The member will be liable for any remaining charge due.

Example

Himesh is a UK taxpayer and has £50,000 excess pension savings on which an annual allowance charge is due for the 2023/24 tax year. His reduced net income is £100,000, so the excess plus the reduced net income totals £150,000. The higher rate tax limit is £125,140 and the basic rate tax limit is £37,700. The total of £150,000 exceeds the higher rate limit by £24,860 so this would be subject to tax at 45%. The tax due would be £11,187.

This leaves £25,140 of the £50,000 excess pension savings. The difference between the higher and basic rate limits is £87,440 (£125,140 less £37,700). As the £24,860 remaining excess is within this limit, then the full £24,860 would be taxable at 40%. The tax due would be £9,944. Himesh’s total annual allowance tax charge is therefore £21,131 (£11,187 + £9,944).

In most cases, it is expected that an annual allowance charge will be paid from an individual’s income. They can do this through their self-assessment tax return. However, to assist those who face large annual allowance charges, members can direct that the charge be met from their registered pension scheme assets provided certain conditions are met. This is referred to as ‘scheme pays’. Our ‘Scheme pays’ guide contains more information on when this option can be used. 

HMRC's guidance on the annual allowance can be found at: