CHANGES TO THE UK PENSION CONTRIBUTION ALLOWANCE

From 5th April 2023, the maximum amount an individual can contribute tax-free to their pension during a tax year (Annual Allowance) has increased to £60,000. As in previous years, this amount is restricted for high earners, who will have a tapered allowance dependent on their level of income.

The restriction applies to individuals whose Adjusted Income or Threshold Income are above certain limits. From 6th April 2023, the threshold income limit stayed the same at £200,000 and the adjusted income limit has increased from £240,000 to £260,000.

 

Definitions

  • ‘Threshold income’ is generally net income less the gross amount of personal pension contributions.

  • ‘Adjusted income’ is net income plus occupational pension contributions plus employer contributions.

  • ‘Annual allowance’ is the maximum amount of pension savings that an individual can make during a tax year with the benefit of a tax relief.

 

Tapered Annual Allowance

The £60,000 Annual Allowance is reduced by £1 for every £2 that the adjusted income exceeds £260,000, to a minimum of £10,000.

Example: If your adjusted income for the 2023/24 tax year is £350,000, your income would exceed the adjusted income limit by £90,000 (£350,000 minus £260,000). Therefore, your annual allowance would be reduced by £45,000 and your new tapered allowance would be £15,000.

Once an individual’s adjusted income has reached £360,000 there is no further reduction, their tapered annual allowance would be limited to £10,000.

Example: If your adjusted income for the tax year 2023/24 is £400,000. Your income would exceed the adjusted income limit by £140,000. Consequently, your annual allowance should be reduced by £70,000. However, the minimum that the annual allowance can be reduced to is £10,000.

 

Excess pension contribution charge

If an individual exceeds the annual allowance in a tax year, they may be subject to an excess pension contribution charge. The excess pension contribution would be taxed at the highest marginal rate applicable, which would be 45% if the individual has a tapered allowance.

If an individual incurs an excess pension contribution charge, they can either pay the charge via their Self-Assessment Tax Return or by making a Voluntary Scheme Pays election.

Voluntary scheme pays’ is a process that allows an individual to pay the excess pension contribution charge directly from their pension. The individual would need to speak to their pension provider about doing this and it is only available under certain circumstances.

However, if an individual has been a member of a registered pension scheme during the previous three tax years, they might be able to carry forward unused annual allowances to cover the charge. It is important to be aware that the maximum tax relief on pension contributions is limited to 100% of the taxpayer’s annual earnings.

If you believe you may have made excess pension contributions, speak with your tax preparer to work out whether you have any unused allowances from earlier years.

 

More detailed guidance on this area can be found on the HMRC Website