Annual Allowance Explained
Annual Allowance is the total you and your employer can put into your defined contribution pension scheme each year without paying tax on these savings. It is a way the government restricts the amount of tax relief given to pensions
How Much Is My Annual Allowance?
In the year 2022/23, the annual allowance was £40,000. For higher earners, with an adjusted income of £240,000 or more and a threshold income of £200,000 or more, there is a reduced, tapered annual allowance.
If you exceed the allowance, then
- you will be taxed on the amount above the threshold, and
- you will be faced with an annual allowance charge
The annual allowance tax charge will probably negate most (if not all) tax relief on the excess above the annual allowance. This charge is generally taken from your income, but you can request that the charge be met from your registered pension scheme assets (known as Scheme Pays).
Carry Forward Annual Allowance
Since 6 April 2011, it has been possible to carry forward unused annual allowance from the previous 3 tax years. This can only be done if an individual first uses up the full annual allowance in the tax year in which they want to use carry forward.
Top Tip! If you would like to save towards your retirement but are at risk of going over your annual allowance, even factoring your carried forward allowance, put the money into an ISA or invest it instead to make the most of your savings.