Should My Daughter Access Her Pension Before Age 55?
Question asked by Irene Flannigan
Is there a tax allowance for personal pensions like with gross income? How much am I allowed to contribute before I lose any tax relief?
Yes, you do, which is one of the reasons why pensions are so worthwhile.
If you’re a basic rate taxpayer, you’ll get 20p tax relief for every £1 you make in pension contributions. If you’re a higher rate taxpayer you’ll get 40p in tax relief for every £1 you pay. This increases to 45p if you pay tax at the 45% additional rate.
There is an annual allowance of the lower of 100% of your earnings or £60,000, which is maximum amount than can be contributed into all your pensions in a tax year. If you or your employer makes contributions over this amount there will be a tax charge at your marginal rate.
However, from April 2023, if your income is over £260,000 – including employee pension contributions, bonuses, interest from savings and dividends – then your annual allowance is reduced, or ‘tapered’, by £1 for every £2 you earn over £260,000, up to a maximum reduction of £30,000.
IMPORTANT NOTICE 🧐
The following information on tapering the annual allowance is subject to change in April 2023.
This means that, if you earn £210,000 or more per year (so your income exceeds £150,000 by at least £60,000 pa), then your annual £40,000 allowance is cut by £30,000 to £10,000.
For a less extreme example, if you earn £10,000 above the £260,000 limit, then your annual allowance is cut by £5,000 (£10,000 x 50%), from £60,000 per year to £55,000 per year.
There is also a lifetime pension allowance, which stands at £1,073,100. This is the maximum total benefit that can be drawn from a pension before there is an extra tax charge, although some people may have been able to protect their lifetime allowance depending on their circumstances.
IMPORTANT NOTICE 🧐
As of the Spring Budget 2023, the UK chancellor announced the abolition of the pension lifetime allowance (LTA). This will take effect from 6 April 2023.
It’s important to note however, the Labour party have announced that if they were to be elected the allowance may be reintroduced in the future. If this occurs, we will update our records to reflect any changes. The information on this page is based on the LTA pre 6 April 2023.