How much can I pay into a pension each year?

Pensions are a heavily regulated area of finance, which is partly why it’s quite difficult to understand.

To make sure you’re getting the most out of your pension contributions, it’s worth taking a moment to understand what the rules are regarding how much you can put in.

If you need some useful guidance when it comes to making the right pension contributions, or you want to know a bit more about how the tax-relief rules work, this straightforward guide should be able to help.

Pension tax limits and rules

Technically there is no limit on the amount of money you can pay into a pension pot. However, you will only receive tax relief on a portion of the amount you contribute. This is called the Annual Limit which as of April 2023 is set at £60,000 per year. It is also possible to put up to 100% percent of your earnings into your pension if you wanted to, but anything in excess of the £60,000 limit or in excess of your income will not qualify for tax relief.

Annual allowance rules

If you pay in more than 100% of your earnings or you exceed £60,000 in contributions in a single tax year, then you won’t be eligible for tax relief on the surplus amount.

The £60,000 limit applies first, so if 100% of your earnings exceed that, you will be charged tax on the excess.

If your earnings are on the higher side at £200,000 per year or more, this Annual Allowance threshold could decrease significantly as you’ll qualify for the tapered annual allowance introduced by the government in 2016. Working out tapered annual allowance can be complicated, however you can read more about this rule here.

You may be able to offset this thanks to the carry forward rule, which essentially enables you to qualify for tax relief even if you go over the allowance threshold with your contributions.

Information on carry forward rules

The carry forward rule enables you to benefit from unutilised annual allowance from previous years, provided you meet some conditions.

Carry forward applies to your annual allowance in the last three tax years. Unused allowance before this time will not be applicable.

You must also have been registered to a pension scheme in whichever of the three years you wish to use carry forward from.

Plus, you need to have used up your full allowance in the tax year you wish to enact carry forward on.

You also have to use the unused annual allowance in order, starting from the earliest year to the latest.

This rule is certainly worth exploring, and it might be highly beneficial for those who have irregular incomes as it might help you get the full benefits of pension tax relief on your contributions.

You don’t need to report this to HMRC either. For more flexible options like only using a portion of the unused allowance, for example, you may want to check on the government’s website, as they have a few tools to help you figure out the numbers.

Where do we come in?

Our team at iSIPP can help you set up regular contributions to your pensions, and we thoroughly believe that pensions should be made easy for everyone.

Keeping track of all your pension pots can be time consuming and complicated and you may be struggling to successfully manage your pension pots. If this is the case pension consolidation could be the answer for you. Check out our website for more information on how the consolidation process works as well as all the benefits.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.