Maximising your pension allowances can help you achieve your retirement goals and ensure that you have enough money to live on when you retire.
The UK Government provides several pension allowances, and it’s important to understand these allowances and how to make the most of them.
Annual Allowance
The Annual Allowance is the maximum amount of money you can contribute to your pension each year, while still receiving tax relief.
For most people, the Annual Allowance has been £40,000 however with the recent Budget announcements, this amount is now increasing to £60,000. Conversely for high earners, it may be reduced to as little as £10,000 (increased again in the Budget from £4000). If you contribute more than the Annual Allowance, you will not receive tax relief on the excess amount.
It’s important to note that the Annual Allowance includes contributions from both you and your employer.
So, if your employer contributes £20,000 to your pension in a given year, you can only contribute £40,000 to your pension to stay within the £60,000 Annual Allowance.
Carry Forward
If you haven’t used up your Annual Allowance in previous years, you may be able to carry forward any unused allowance to the current tax year.
This can be particularly useful if you have a higher income in a particular year and want to make a larger pension contribution to reduce your tax bill.
To use carry forward, you must have been a member of a registered pension scheme during the previous tax year and have unused Annual Allowance from that year. You can carry forward unused Annual Allowance from the previous three tax years.
Lifetime Allowance
The Lifetime Allowance was previously the maximum amount of money you can save in your pension over your lifetime, while still receiving tax relief, which was set at £1,073,100. In the recent Budget the Chancellor announced that this will be abolished altogether from 6th April 2023.
Salary Sacrifice
Salary sacrifice is a way of making pension contributions that can be tax efficient. Rather than making a pension contribution from your net pay, you can arrange with your employer to make a pension contribution from your gross pay.
This means that you will receive tax relief on the full amount of your contribution, rather than just on the amount after tax.
Salary sacrifice can be a particularly effective way of maximising your pension allowances if you are a higher-rate taxpayer.
By sacrificing some of your salary to make a pension contribution, you can reduce your taxable income and potentially reduce the amount of Income Tax you pay.
