Annual and lifetime limits to consider
Tax relief means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.
Tax relief on your annual pension contributions
If you’re a UK taxpayer, in the tax year 2015/16 the standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever
However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.
But there is an exception to this standard rule. If you have a Defined Contribution pension, the annual allowance reduces to £10,000 in some situations.
From April 2016, the £40,000 annual allowance will be reduced if you have an income of over £150,000, including pension contributions.
The Money Purchase Annual Allowance (MPAA)
In the tax year 2015/16, if you start to take money from your Defined Contribution pension, this can trigger a lower annual allowance of £10,000 (the MPAA). That means you’ll only receive tax relief on pension contributions of up to 100% of your earnings or £10,000, whichever is lower.
Whether the new lower £10,000 annual allowance applies depends on how you access your pension pot, and there are some complicated rules around this.
The lower annual allowance of £10,000 only applies to contributions to Defined Contribution pensions. So, if you also have a Defined Benefit pension (this pays a retirement income based on your final salary and how long you have worked for your employer and includes final salary and career average pension schemes), you can still receive tax relief on up to £40,000 of contributions a year.
Tax relief if you’re a non-taxpayer
If you are not earning enough to pay Income Tax, you can still receive tax relief on pension contributions up to a maximum of £3,600 a year or 100% of earnings, whichever is greater, subject to your annual allowance. For example, if you have relevant income below £3,600, the maximum you can pay in is £2,880 and the Government will top up your contribution to make it £3,600.
How much can you build up in
A lifetime allowance puts a top limit on the value of pension benefits that you can receive without having to pay a tax charge. The lifetime allowance is
£1.25 million for the tax year 2015/16 (falling to £1 million in April 2016). Any amount above this is subject to a tax charge of 25% if paid as pension or 55% if paid as a lump sum.
Workplace pensions, automatic enrolment and tax relief
Since October 2012, a system is being gradually phased in requiring employers to automatically enrol all eligible workers into a workplace pension. It requires a minimum total contribution, made up of the employer’s contribution, the worker’s contribution and the tax relief.