There is a limit to how much you can contribute to your pension pot each year before you have to start paying tax on it – this is called the Pension Annual Allowance. The maximum you can contribute to your pension without being charged tax is £60,000 per annum.
There are, however, two circumstances that may reduce this figure:
You’ll have what is known as a ‘tapered allowance’ if your income before tax and pension contributions is over £200,000, and all of your taxable income is over £240,000.
In this case, your allowance will be reduced by £1 for every £2 that your adjusted income exceeds £240,000.
Once you reach the age of 55, you’ll finally be able to access the pension you’ve worked so hard for. But what are the tax implications of doing this?
Well, the general rule is you can take up to 25% of your pension pot without paying tax. Anything over 25% will be taxed as earnings along with any other taxable income you have (i.e your wages).
Good news! If you haven’t used your allowance, you can carry it forward from the past three years.
So, if you’ve paid £30,000 into your pension for the past three tax years, then you’ve got £30,000 worth of allowance to play with in the next tax year (£10,000 for each year).
You’re then able to contribute a whopping £70,000 to your pension in one tax year and get full tax relief on it.
If you pay in more to your pension than you’re allowed to in a tax year, there are two consequences you’ll face:
The amount that you pay into your pension depends on your qualifying earnings before the deduction of Income Tax and National Insurance. Your employment contract will detail your specific contributions, so check with your employer for your pension information.
You must have been a member of a private pension scheme for each year you’re carrying forward. To learn more about carrying forward a pension allowance, read our glossary page now!