In the world of personal finance, there are numerous terms and concepts that may seem a little mind boggling at first glance. One such term is the “annual allowance.” While it might sound like a straightforward concept, it holds a significant role in various financial matters, especially within the context of pensions and taxation. In this article, we take a look at what the annual allowance is and what its implications are for those who save into a private pension.
What is the Annual Allowance?
The annual allowance is the total amount you can save into your pension plans before incurring an additional tax charge. The limit on the amount of money you can save into your pension pot annually, without incurring additional taxes, is set by the government. At the time of writing, this was increased to a maximum of £60,000 during the governments Spring budget in April 2023.
What happens if I exceed this amount?
Exceeding the annual allowance can lead to a tax charge, known as the “annual allowance charge.” This charge is essentially the tax on the excess contributions made beyond the annual allowance. It’s important to monitor your contributions and seek advice from a qualified, registered financial adviser if you are unsure about your pension contributions’ implications on taxation. It may also be possible to contribute more than your annual allowance and still benefit from the tax relief by using unused allowance the last three tax years (known as carry forward).
What happens if I’m already withdrawing money from my pension?
If you access any taxable money from your pension plan – either through a drawdown arrangement or from cashing in your pension savings, you may be subject to the ‘money purchase annual allowance’. As of April 2023 the amount you can save into your plan will usually reduce from £60,000 to £10,000.
Higher earners
If you have an income of £200,000 or more then you may be impacted by somethings known as the ‘tapered annual allowance’. This gradually reduces the amount you can save into your pension each tax year depending on your earnings. The lower limit for this is currently set at £10,000.
Why it matters
Understanding the annual allowance is essential for anyone who wishes to make the most of their pension savings while staying within the boundaries of the tax system. Keeping track of your contributions, considering carry forward options, and being aware of any exemptions or reductions can help you make informed decisions regarding your retirement planning. As tax laws and regulations can change, it’s important to stay updated on the latest information and consult your financial adviser to ensure your financial choices align with your long-term goals.
Please note: We are not authorised to give advice under the Financial Services and Markets Act 2000, or any other kind of taxation or professional advice. For advice, speak with or consult your Financial adviser.
