How to Maximise Your Pension Contributions

Last month our article on retirement planning addressed what would happen if you breached the Lifetime Allowance limit, but this isn’t the only limit set by the Government.

The Annual Allowance limits how much can be paid into a pension arrangement upon which you can receive tax relief. It’s currently set at £40,000 and not everyone fully utilises it, but if you can, why wouldn’t you?

If you’ve not used your full Annual Allowance in the current or any of the previous three tax years, you can legitimately pay in more than the annual limit by utilising Carry Forward. This is especially important for higher earners, who can face restrictions on the amount of tax relief they receive on pension contributions.

Carry Forward rules and limits

To qualify for Carry Forward, you must:

  • Have a valid pension scheme in place for each year from which you are carrying forward, even if you haven't paid into it, and;
  • Have earnings at least equal to the amount that you are paying. For example, if you wanted to make a contribution of £100,000 then you must have earnings of at least £100,000 in the tax year you are making the payment.

The maximum you can carry forward depends on how much Annual Allowance you have left. You must first use up the Annual Allowance in the current tax year before going back as far as the three previous tax years.

When working this out, you should include any pension contributions made personally as well as your employer, plus pension benefits built up in a final salary pension scheme.

 Tax year (6th April – 5th April)

 Annual Allowance

 2015/16 *

 £40,000

 2016/17

 £40,000

 2017/18

 £40,000

 2018/19

 £40,000

* This is split into two mini tax years. Individuals may have an Annual Allowance of £80,000.

The Government automatically adds 20% tax relief to your payments. Higher rate taxpayers can claim an additional 20% relief and additional rate taxpayers can claim 25% through self assessment tax returns.

High Earners

Those with a ‘Threshold Income’ over £110,000 and ‘Adjusted Income’ over £150,000 will find their Annual Allowance is reduced by £1 for every £2 of income in excess of this figure, until it reaches £10,000. This is called the Tapered Annual Allowance and was introduced on 6 April 2016.

Broadly speaking, Threshold Income is your total taxable income, inclusive of any salary or bonus sacrificed for pension contributions on or after 9 July 2015, less any personal pension contributions and allowable reliefs. Adjusted Income is your total taxable income plus employer pension contributions.

Pensions continue to offer a valuable means of retirement saving and for most people the State Pension, which for many won’t become payable until their mid to late 60s, just isn’t sufficient to maintain a comfortable lifestyle.

Pensions can be complex so professional financial advice can help significantly. Please call me on 01228 690000 or email me

Email Matthew

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