An Annual Allowance for pension savings applies each year which is based on a pension input period (PIP).
Since the Emergency Budget in July 2015 PIPs were adjusted to align with the tax year – i.e. commencing on 6th April in one year and ending on the 5th April during the following year.
The Annual Allowance is a limit so far as tax relief is concerned and is in place to restrict the amount of tax privileges available on pension savings each year. It is important to understand that there is no limit on the amount you can save into your pension each year, but the Annual Allowance limits the amount of tax relief you can receive on contributions paid to your Pension.
This limit is applicable to the total amount of contributions that can be paid to Defined Contribution pension schemes and the total amount of benefits that can be accrued within Defined Benefit pension schemes each year linked to the PIP.
The Annual Allowance has changed several times since it was introduced in 2006 and is currently £40,000.00. Within this allowance, tax relief on members’ gross contributions is restricted to the higher of £3,600.00 or 100% of relevant UK earnings.
Employer contributions are not restricted in this way but may not receive tax relief on the entire contribution.
Individuals are subject to a tax charge on the amount of any contribution paid (by the member, employer or a 3rd party) in excess of the annual allowance each year. The tax charge will be at the member’s marginal rate of tax and the aim of this charge is to effectively claw back any excess tax relief that had been applied to contributions in excess of the Annual Allowance.
It is important to note that if you have already taken income from your Pension, in excess of your tax-free entitlement, then your Annual Allowance will be reduced as the Money Purchase Annual Allowance (MPAA) will apply to your retirement planning.
Furthermore, if your income is in excess of £110,000.00 per annum then your Annual Allowance will also be reduced because the Tapered Annual Allowance will be applicable.
PAS Financial Planning intends to cover these important topics in future articles. Factors such as the MPAA and the Tapered Annual Allowance place emphasis on the importance of seeking professional financial advice so as to maximise the benefits of financial and retirement planning contributions.
Utilising the services of a company such as PAS Financial Planning who specialise in retirement planning is a prudent way of planning efficiently for the future and capitalising upon individual tax allowances available to you and those permitted by Her Majesty’s Revenue & Customs (HMRC).