When making contributions to your pension, it’s important to keep in mind that there’s a limit to how much you can contribute each year without incurring additional taxes. This limit is known as the pension Annual Allowance. On 6 April 2023, new pension legislation came into effect, presenting significant opportunities for various individuals.
Among other things, the pension Annual Allowance increased from £40,000 to £60,000. Additionally, the ‘adjusted income’ threshold for Annual Allowance tapering increased from £240,000 to £260,000 and the minimum tapered Annual Allowance increased from £4,000 to £10,000 (meaning that individuals with annual adjusted income of £360,000 or more will have an annual allowance of £10,000).
EXCESS CONTRIBUTIONS
If you exceed the Annual Allowance, you won’t receive tax relief on the excess contributions, and you may be subject to an Annual Allowance charge. One way to reduce or eliminate this charge is by taking advantage of carry forward. This option allows you to use any unused allowance from the previous three tax years to offset your contribution in the current year.
Carry forward is not available to everyone, it’s only available to those who are not subject to the MPAA. Additionally, you’ll need to make sure that you don’t exceed your pension Annual Allowance in the current tax year, even after using carry forward.
TAX BENEFITS
If you do find yourself facing a pension Annual Allowance charge, you may be able to ask your pension scheme to pay the charge from your pension using Scheme Pays. This would result in a reduction in your pension, so it’s important to carefully consider whether this is the right option for you.
It’s important to recognise the tax benefits associated with contributing to your pension plan and staying up to date on changes to pension allowances and contribution rules. Given the tax benefits associated with contributing to a pension plan, it’s worth considering whether increasing contributions can help you meet your long-term retirement savings goals.
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