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What is Annual Allowance?

The Annual Allowance is a limit on the total amount of pension savings you can make each year without incurring a tax charge. It applies to all your pension schemes in total, not individually.

The limit for the current tax year is £40,000. This limit includes all your contributions, tax relief and employer contributions across all pension arrangements you may have. There is a tapered reduction in the Annual Allowance for individuals with adjusted income (including the value of any pension contributions) of over £240,000 in a tax year, where their income (excluding pension contributions) is in excess of £200,000. For every £2 of adjusted income above £240,000, your annual allowance will reduce by £1. From 6 April 2020 the minimum that this can reduce to is a tapered annual allowance of £4,000.

Please see What is Tapered Annual Allowance? for further details.

The limit for future Defined Contribution (DC) contributions will be reduced to £4,000 (Which is known as the "Money Purchase Annual Allowance" (MPAA) for any DC contributions you make if you have cashed in a DC pension pot (i.e. taken more than the 25% tax free lump sum) or you are drawing down an income from a 'flexi-access drawdown fund'. This applies if you want to continue making pension savings in a DC pension arrangement. If you also have Defined Benefits (DB) with your current employer, the MPAA reduces the Annual Allowance for your DB benefits to a maximum of £36,000.  The MPAA only applies to contributions to DC pensions and not to defined benefit schemes.

Please consider taking independent financial or tax advice if this applies to you.

Exceeding the Annual Allowance

If you exceed the Annual Allowance in a tax year, you won't receive tax relief on any contributions that are above the limit and you will have to pay an Annual Allowance charge.

You may be able to use any leftover Annual Allowance from the previous three tax years to reduce or cancel the Annual Allowance charge if you did not use your full Annual Allowance in those years. This does not apply if you have a "Money Purchase Annual Allowance" (MPAA).

The Annual Allowance charge will be added to the rest of your taxable income for the tax year in question, and used to work out your tax liability. If the Annual Allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. Your pension scheme benefits would be reduced accordingly to take account of the charge.

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