HMRC data has revealed a significant increase in the total value of pension contributions exceeding the annual allowance. This is mainly due to the complex rules and regulations surrounding the annual allowance that many people are unaware of. Statistics which cover 2017/18, show 26,550 people reported contributions exceeding the £40,000 annual allowance.
What is the Annual Allowance?
The annual allowance limit for the current tax year is £40,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. Contributions over this limit will result in a tax charge, known as the annual allowance charge.
The amount you save into your pension pot can benefit from tax relief, as long as that amount doesn’t exceed the annual allowance in any tax year. If your taxable earnings in the year are below the annual allowance, then you can receive tax relief on 100% of your earnings (up to the annual allowance), or £3,600 gross, whichever is higher.
If you have an income of over £150,000 in a tax year, then your annual allowance for that tax year will reduce on a tapered basis. The rules around the tapered annual allowance are complex.
Many people are not aware that if you take flexible lump sums from your pension savings or start taking an income from flexi-access drawdown, you’ll be subject to a reduced money purchase annual allowance of £4,000 (2019/20) for future contributions made into defined contribution pension.
Here to Help
As many people are discovering, a breach of allowances can be extremely costly. Its therefore imperative to seek professional advice if you are unsure how pension allowances impact on you.
Prismatic Wealth have a range of services that can assist you on your financial journey, to discuss your options contact us on 01642 661600 or enquiries@prismaticwealth.co.uk .