Pension Contributions
(for higher rate and additional rate taxpayers)
If you are a higher or additional rate taxpayer (intermediate rate, higher rate or top rate for a Scottish taxpayer) you can save Income Tax by making personal pension contributions for the tax year.
You must have sufficient earned income (principally employment income or trading profits) to cover the personal contributions.
If you have no earned income, your annual personal contribution is capped at £2,880 (net of tax), with the government adding a tax-free credit of 20% on top of the contribution, taking it to £3,600.
You can typically contribute up to £60,000 per year (which includes employer and personal contributions) into a pension scheme. The AA in the three years prior to 2023/24 was £40,000
If you are already drawing down a pension from a Money Purchase (Defined Contribution) scheme, the £60,000 AA is replaced by a £10,000 Money Purchase Annual Allowance (MPAA).
Tax Year
Annual Allowance
Threshold Income limit
Adjusted Income limit
Minimum tapered Annual Allowance
2020/21 to 2022/23
£40,000
£200,000
£240,000
£4,000
2023/24
£60,000
£260,000
£10,000
If you have not made use of your full AA/MPAA in the preceding three years and were a member of a qualifying pension scheme in that time, you can utilise any such unused allowance in the current tax year.
If you are a member of a Final Salary (Defined Benefit) scheme the contributions to the scheme are determined by reference to the increase in the value of defined benefits not the contributions to the pension scheme.
If too much is paid in to your pension, you will be subject to an annual allowance charge, which is charged at your marginal (top) rate of tax.
* There are rules that taper (reduce) the AA available to you, based upon the concepts of ‘Threshold Income’ and ‘Adjusted Income’. These rules are complex but, in outline, the AA is reduced if your income in a tax year exceeds the Adjusted Income. The reduction is £1 for every £2 by which your Adjusted Income exceeds the limit (as shown), and the AA cannot be tapered below the minimum tapered AA (as shown).
Employer Pension Contributions are extremely tax-efficient and can be an essential part of the reward strategy for directors and key employees. The company can make employer pension contributions on your behalf in order to maximise the AA (including any unused AA brought forward from the previous three tax years).
The company can claim tax relief on the employer contributions, provided these are not considered excessive, and you do not incur a tax charge if the relevant conditions above are met.
The total value of your pension savings are subject to a Lifetime Allowance (LTA), currently £1,073,100 for 2023/24.
There was a tax charge on the value of the pension funds that exceed the LTA once you go in to drawdown, but this has been removed for 2023/24 and the Lifetime Allowance is set to be abolished from 6 April 2024
Once you turn 55, you can take out 25% of your pension fund tax-free (with fund value capped at the LTA for these).
You now have more flexibility with how you can access your pension fund once you turn 55 (i.e. you do not have to buy an annuity).
For example, you can take it all out as a lump sum or spread your drawings over more than one tax year, and decide on how much you draw each year.
However, you need to consider the potential tax implications of drawing large amounts from your pension fund as these are generally taxed as income when they are drawn.
You can make personal contributions on behalf of your family, with the contributions going to their respective pension funds.
This can include your children, grandchildren and members of your family who are not working.
Where they have no earnings, you can make yearly contributions of £2,880 for each individual, with the government adding a tax-free credit of 20% on top of the contributions.
A long-term benefit with building up a pension fund is that the value of the fund is typically not liable for IHT at 40%. The pension funds can be transferred to the beneficiaries free of IHT. You must ensure that you have nominated who inherits your pension fund.
The beneficiaries will be liable to Income Tax if they subsequently draw funds from the pension fund. However, there is no Income Tax charge if you, as the pension fund holder, die before the age of 75.
If the total of all your pension funds is likely to be at or near £1m by the time you retire, you should seek advice on your options.
If you were already in flexible drawdown prior to 6 April 2015, you can move to the new, unlimited regime and draw more income than the current maximum, however that can lead to restrictions on further contributions (see MPA above).
