The pension annual allowance is a limit to the total that you can pay into a pension scheme in one tax year while benefitting from tax relief. Tax relief on your pension contributions is paid at your income tax rate, so if you are an additional rate tax payer then you will receive 45% tax relief so £100 contribution would only cost you £65.
In the 2024/25 tax year, the pension annual allowance to £60,000 per tax year or up to 100% of your annual earnings if this is lower than £60,000. The annual allowance includes your personal contributions, employer contributions and tax relief. It doesn’t include the State Pension.
For example, if your UK earnings are £35,000 gross, then you can personally contribute up to a maximum of £28,000 net into your pension which is £35,000 minus basic rate tax as the tax relief will top up your £28,000 to £35,000.
What happens if I contribute more than pension annual allowance?
If you go over the pension annual allowance, you may have to pay an additional tax charge on the excess amount. The amount of the tax charge you will have to pay depends on your marginal rate of income tax. The charge is to reclaim the tax relief that you received on the excess contributions.
What is the carry-forward allowance?
You may be able to carry forward any unused pension allowances from the previous three tax years. This may mean that if you go over the limit in one tax year you will not be subject to the annual allowance charge.
The carry forward allowance can be complicated, a financial adviser at Four Wealth Management can help you to calculate how much you have remaining and if you need to declare anything to HMRC.
If you are looking to contribute a large lump sum to your pension, then you might not incur the tax charge mentioned above because of the ‘carry forward allowance’.
The carry forward allowance allows you to carry forward any unused pension allowances from the previous three tax years. This may mean that if you go over the limit in one tax year you will not be subject to the annual allowance charge.
For example, in the 2023/24 tax year, the annual pension allowance was £60,000 but if you only contributed £30,000 that tax year then you can carry forward £30,000 to contribute in the current 2024/25 tax year on top of your annual allowance.
Pension carry forward allowance is useful for business owners or those who are self employed and have irregular income or for those who want to make larger pension contributions in a specific year.
The carry forward allowance is complicated, especially now that the annual allowance has changed from last year tax. A financial adviser at Four Wealth Management can help you to calculate how much you have remaining and if you need to declare anything to HMRC.
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Can I contribute to a pension if I am not working?
If you are unemployed then you can contribute up to £2,880 to a pension each tax year. This amount receives tax relief of 20% which tops up your contribution to £3,600 in total.
This amount can also be contributed to a child’s pension.
Make the most of your pensions
Pension rules and allowances are complex and the rules change frequently. A financial adviser at Four Wealth Management can help you to understand which tax reliefs and allowances apply to your personal circumstances so you can make the most from your pension.
Book a no-obligation meeting now or call us on 0117 973 0500
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
