Could you explain to me what the annual allowance is and what it means for my pension? Also, I’ve heard that there’s also a reduced annual allowance. Will I be able to contribute less to my pension as a result?
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 2019/20 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.
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.
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.
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.
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