What Is My Pension Annual Allowance? How Do I Calculate It?

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What is the Pension Annual Allowance?

The pension annual allowance is how much you can contribute to a pension each tax year and still get tax relief. It’s not a per scheme figure — it applies across all the pension schemes in which you’re a member.

It’s currently capped at £40,000 or 100% of your earnings, whichever is lower. If you’re a non-earner, you can contribute up to £2,880 per year into a pension, which the government will round up to a maximum of £3,600 with tax relief.

The government has steadily whittled down the pension annual allowance over the years; it used to stand as high as £255,000 in the 2010/11 tax year before being drastically slashed to its current level.

If you go over the pension annual allowance, you’ll face a tax charge on the payments into your pension that have exceeded the annual allowance.

Do Employer Pensions Contributions Count Towards the Annual Allowance?

Yes, the annual allowance includes all contributions made into a pension in your name, therefore encompassing employer contributions as well as your personal contributions.

How is the Annual Allowance Calculated?

For a defined contribution or money purchase pension scheme, the calculation is quite easy. The pension annual allowance is calculated simply as a gross figure paid into your pension, encompassing contributions made by you, your employer, or anyone else on your behalf, plus any basic-rate tax relief added.

For a defined benefit (e.g. a final salary) scheme, the calculation is far more complicated. It involves working out the ‘opening’ and ‘closing’ value of your pension in any given tax year. The annual allowance is based on any increase in the value of your pension entitlement in that tax year.

For this, you’ll need to know:

  • Your pensionable earnings at the start and end of the tax year
  • The number of years you’ve been contributing to the scheme
  • Your scheme’s accrual rate (e.g. 1/60th)
  • Any inflationary increase the pension fund applies to your pension.

There’s then a formula using the above to calculate how much your defined benefit pension has increased by and whether you’ve therefore exceeded the annual allowance. As mentioned, this is a complex calculation and one where it may be best to get advice to ensure you get it right.

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What is the Tapered Annual Allowance?

While the £40,000 annual allowance covers most people, high-earners have a reduced annual pension allowance to contend with. This is known as the tapered annual allowance.

The tapered annual allowance means that if your adjusted income — total taxable income, so salary, dividends, rental income, savings interest etc., plus employer pension contributions — is more than £150,000, your annual allowance reduces, or ‘tapers’ downwards by £1 for every £2 your income exceeds £150,000.

The maximum tapering of the annual allowance is £30,000, reducing the amount you can pay into your pension and still get tax relief to £10,000 per tax year. This applies if your adjusted income is £210,000 or more.

If you face the tapered annual allowance, it notably reduces the amount you can pay into your pension each tax year and could therefore impact your ability to effectively save for retirement.

You have a few options if this applies to you. The first is seeing whether you can carry forward unused pension annual allowance from previous tax years to make up for lost contributions. The second is to consider other tax-efficient investment options outside of pensions that may help depending on your circumstances.

What is the Money Purchase Annual Allowance?

The money purchase annual allowance (MPAA) is another reduction to your annual allowance that you’ll face once you begin flexibly drawing on your defined contribution pension scheme.

The money purchase annual allowance means you can continue to pay just £4,000 into a pension each tax year once you’ve flexibly accessed a money purchase pension.

Once you’ve triggered the money purchase annual allowance, you can no longer carry forward unused pension annual allowances from previous tax years, either.

The rule doesn’t apply to defined benefit schemes, so you can claim a final salary income and still continue to contribute up to your annual allowance to a pension scheme or schemes.

What Counts as Flexibly Accessing Your Pension?

  • Entering flexible drawdown before 6 April 2015
  • Exceeding income limits from capped drawdown set up before 6 April 2015
  • Taking an uncrystallised funds pension lump sum (UFPLS) or a standalone lump sum
  • Taking an income payment from a drawdown scheme set up after 5 April 2015
  • Taking an income payment from drawdown converted to flexible drawdown after 5 April 2015
  • Receiving an income payment from a scheme pension with 12 or fewer members or from a flexible annuity.

What Doesn’t Count as Flexibly Accessing Your Pension?

  • Taking a pension (or an arrangement within a pension) as a small pot due to it being worth less than £10,000
  • Taking income from capped drawdown set up before 6 April 2015 which remains within capped drawdown limits
  • Taking tax-free cash and no income
  • Taking a pension as a non-flexible annuity or scheme pension other than as described above.

What is Pension Carry Forward?

Unless you’ve triggered the money purchase annual allowance, you have the option to carry forward unused pension contributions from the previous 3 tax years to the current tax year.

If you’re making personal contributions, this is providing your income supports these higher level of pension contributions.

For employer contributions, there is no limit based on your earnings but you must be able to prove that pension contributions the company makes for you are ‘wholly and exclusively’ for the benefit of the business and ‘commercially reasonable’ remuneration for work done.

Why Carry Forward Pension Allowance?

There could be a number of reasons that it becomes viable to carry forward pension annual allowance from previous tax years that’s so far gone unused. For instance, it could be an option to consider for:

  • Those with an income in excess of £40,000 in the 2019/20 tax year wishing to maximise pension contributions
  • Those such as the self-employed or company directors who have irregular earnings and want to make a large pension contribution in a particularly profitable year
  • Employers wanting to make large contributions on behalf of employees
  • Those impacted by the tapered annual allowance.

How Does Pension Carry Forward Work?

If you didn’t make your fully allotted pension contribution in any of the previous 3 tax years, you have the option to carry forward that unused allowance to the current tax year to maximise pension contributions today.

How Much Pension Allowance Can I Carry Forward?

You can carry forward 3 years worth of contributions to the current tax year. For the tax year 2019/20, this would be:

  • Up to £40,000 from the 2016/17 tax year
  • Up to £40,000 from the 2017/18 tax year
  • Up to £40,000 from the 2018/19 tax year.

Note that this is the maximum you can contribute from previous tax years; if you’ve made any contributions in those tax years, the amount you can carry forward is reduced by the value of those contributions.

Carry Forward: An Example for Tax Year 2019/20





Annual Allowance





Pension Allowance Used





Available Annual Allowance





Amount available for pension carry forward in current tax year


At or Approaching Your Annual Pension Allowance? Your Options…

Since the sharp reduction in the annual allowance from £255,000 to £40,000 today, plus the introduction of the tapered annual allowance, many clients are coming to us having butted up against this contribution ceiling wondering if there’s anything they can do to maximise saving.

If you’ve already made maximum use of available carry forward from previous tax years, then you may want to consider other tax-efficient investment options to continue building up your retirement nest egg.

The most common options are:

Individual Savings Accounts (ISAs)

With an ISA you can invest in cash or investment funds. You pay into an ISA from post-tax income so there’s no tax on withdrawals. There’s also no tax to pay on any subsequent capital gains or dividends you might receive.

You can pay up to £20,000 per year into an ISA and can hold more than one account (e.g. one cash ISA and one stocks and shares ISA), so long as you don’t contribute more than £20,000 across your accounts.

Venture Capital Trust (VCT)

Venture Capital Trust (VCT) is a company which invests in very small, startup companies with shares traded on the stock market.

Given the companies you invest in are fledgling businesses, not all of them will succeed so there’s a possibility of a company or companies you put money into failing and you getting back less than you invested.

VCT shares can also be hard to sell, so you may not be able to liquidate them quickly if required.

Tax relief on VCTs

VCT investors receive notable tax benefits in the form of income tax relief at 30% on annual contributions of up to £200,000. That means, for example, that if you invest £100,000, you’ll get £30,000 back from the taxman. Note that you only get to keep this tax rebate if you hold your VCT shares for at least 5 years.

There is also no tax on gains, regardless of how long you hold the VCT, as well as no income tax to pay on dividends.

As a result, VCTs may seem more attractive to high earners given today’s reduced dividend allowance, which means that those receiving more than £2,000 in dividend income outside an ISA now pay more tax.

However, despite all the tax benefits of VCTs, they will only be suitable for a minority of investors due to the risks involved, so always get professional advice before you invest.

Enterprise Investment Scheme (EIS)

The EIS was launched in 1994 to encourage people to invest in small companies. Investors who put cash into small, unquoted companies through an Enterprise Investment Scheme can enjoy several tax incentives.

When you make your initial investment, which you usually make directly in a qualifying company, you receive income tax relief at 30% of the cost of the shares. For example, if you invest £10,000, you can reduce your income tax by £3,000 that year. You can also “carry back” this relief to help reduce your income tax liability in the previous year.

There’s also no capital gains tax to pay on any profits you make from an EIS investment. If your investment performs badly and you make a loss, you can offset that loss against income tax. You must hold EIS investments for a minimum of 3 years in order to qualify for this capital gains and income tax relief.

You will, however, have to pay tax on any dividends you receive.

The maximum amount you can invest in any one company is £1m, and there is no minimum. EISs are generally long-term investments, so won’t be suitable if you need ready access to your money or cannot afford to tie it up for an extended period of time.

EIS investments are protected from inheritance tax providing you’ve held them for at least 2 years at the date of your death.

As with VCTs, an EIS is a high-risk investment that can be difficult to sell. It’s unlikely to be suitable for those with low risk appetite or those who may need ready access to their funds.

Seed Enterprise Investment Scheme (SEIS)

Seed Enterprise Investment Schemes (SEIS) were introduced in 2012. They work in a similar way to EIS, except you invest in even smaller start-up companies. These are particularly high-risk, so investors are offered even more generous tax breaks.

You’ll get income tax relief at 50% rather than 30%, so for every £10,000 you invest, you can deduct £5,000 off your income tax bill. There is no capital gains tax to pay and, as with EIS, you can offset any losses against tax as well.

There are other capital gains tax benefits too. If you’ve recently had to pay capital gains tax on another investment, you can reclaim up to 50% of this tax as long as you reinvest the money into SEIS.

The maximum you can invest though SEIS in any one tax year is £100,000.

These investments are even higher risk than VCTs and Enterprise Investment Schemes, so are only suitable for a minority of people. Discuss such investments with your adviser before going ahead and only after other forms of tax-efficient investments have been looked into.

Your Financial Plan: Build A Better Future

When making pension contributions or paying into other investments as a way of saving towards your financial future, it pays to know whether you’re on the right track.

It’s something many of us worry about. Am I saving enough for retirement? How long will my pension last? Will we be financially secure in our old age?

Fortunately, a good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

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