What is the pension annual allowance?

Could you explain to me what the annual allowance is and what it means for my pension?
Also, I’ve heard that the government is considering a reduced annual allowance. Will I be able to contribute less to my pension in the future?

Question asked by Mr S Pavani
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Answered by Michael Englefield

The annual pension allowance explained

The annual allowance is how much you can contribute to your pension each tax year and still get tax relief on those contributions. The annual pension allowance in the 2016/17 tax year is £40,000 for most people.

The government has in fact already reduced the annual allowance over a number of years since 2010/11, when it stood at £255,000.

Today’s £40,000 annual allowance threshold is a gross figure – it includes HMRC’s contributions to your pension in the form of tax relief and any contributions from your employer.

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If you’d like to work out how much you can pay into your pension this tax year, our pension annual allowance calculator does all the calculations for you.

Neil Adams
Pension Specialist at Drewberry

Importantly, if you want to pay the maximum £40,000 annual allowance into your pension, your earnings will need to be at least equal £40,000 to do so.

Tapered annual pension allowance for additional rate taxpayers

Another way in which the government has reduced the annual allowance will affect those who have a combined taxable income and pension contributions of over £150,000 per year.

Higher earners could have their annual pension allowance tapered down to £10,000.

From April 2016, anyone in this with such earnings will see their annual pension allowance taper off by £1 for every £2 they earn above £150,000. This is subject to a maximum tapering of £30,000.

As such, anyone with an annual pensionable income of £210,000 or more from the 2016/17 tax year onwards has their yearly pension allowance tapered down to just £10,000. This tapering of the maximum pension contribution you can make is also taken into account in Drewberry’s annual pension allowance calculator.

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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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