Saving into a pension is one of the most tax-efficient ways to save for retirement. Not only do pensions enable you to grow your retirement savings largely free of tax, but they also provide tax relief on contributions. However, there are various pension allowances in place that you need to be aware of. These limit the amount of money you can contribute to a pension in a year, as well as the total amount of money you can build up in your pension accounts, while still enjoying the full tax benefits.
Annual allowance
Your annual allowance is the most you can save in your pension pots in a tax year before you have to pay tax. You’ll only pay tax if you go above the annual allowance, which is £40,000 for this this tax year (6 April 2022 to 5 April 2023).
Your annual allowance applies to all of your private pensions, if you have more than one. This includes:
- the total amount paid into a Defined Contribution scheme in a tax year by you or anyone else (for example, your employer);
- any increase in a Defined Benefit scheme in a tax year.
If you use all of your annual allowance for the current tax year you might be able to carry over any annual allowance you did not use from the previous three tax years.
Lifetime allowance
The lifetime allowance is the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. The lifetime allowance for most people is £1,073,100 in the tax year 2022/23 and has been frozen at this level until the 2025/26 tax year.
There’s no limit on how much you build up in pension benefits. But checks are carried out at certain times to see if the value of your pension benefits exceeds the lifetime allowance. The allowance applies to the total of all the pensions you have. If you’ve built up more than the value of the lifetime allowance when a check is carried out, you might have to pay a tax charge. This is called the lifetime allowance charge.
