Introduction and History of Pensions Annual Allowance
Published / Last Updated on 02/11/2023
Pensions Simplification started in 2006 and it was supposed to simplify pensions overall but as ever, HMRC and Governments ever complicate things to bring in more stealth taxes.
Under pensions simplification, a Lifetime Allowance (LTA) was introduced to simplify how much each of us can amass in pension funds and benefits over our lifetime.
See: Lifetime Allowance
Pensions simplification also introduced the Annual Allowance (AA).
What is the Annual Allowance?
This is the maximum value (or equivalent value) that you and your employer can pay in (or be deemed have paid into) you pension funds each year.
This is usually the lower of your salary of the annual allowance. For example, in tax year 2023/24 the annual allowance is £60,000.
- If you earn £30,000 pa, the maximum you and your employer can pay into pensions is £30,000 for that year.
- If you earn £80,000 pa, the maximum you and your employer can pay into pensions is £60,000 for that year.
What Figures do I use for Annual Allowance?
- Defined Contribution/Money Purchase/Invested Funds = The total value of the gross (after tax relief) amounts paid into your pension funds by you and your employer in the tax year.
- Defined Benefit/Final Salary/Career Average Salary = Multiple set by the Government Actuaries Department (GAD) of 16 X the increase in the value of your pension benefits entitlement when compared to last year (inflation adjusted), e.g., pension entitlement this year £20k pa, pension entitlement last year £14k pa. A £4k pa pension benefit increase but with say an inflation adjustment down to £3.5k pa increase X 16 = £56,000. This is the equivalent annual pension contribution by you and your employer.
See more on Defined Benefit Annual Allowance Calculation: DB AA
Annual Allowance History
|
Tax Year |
Annual Allowance |
Tax Year |
Annual Allowance |
|
2006/07 |
£215,000 |
2016/17 |
£40,000 |
|
2007/08 |
£225,000 |
2017/18 |
£40,000 |
|
2008/09 |
£235,000 |
2018/19 |
£40,000 |
|
2009/10 |
£245,000 |
2019/20 |
£40,000 |
|
2010/11 |
£255,000 |
2020/21 |
£40,000 |
|
2011/12 |
£50,000 |
2021/22 |
£40,000 |
|
2013/14 |
£50,000 |
2022/23 |
£40,000 |
|
2014/15 |
£40,000 |
2023/24 |
£60,000 |
|
2015/16 |
£40,000 |
|
|
What if you Exceed the Annual Allowance?
If you exceed the Annual Allowance, you will face a tax penalty from HMRC. In short, you will be refunded tax relief granted to your and your employer on any excess pension contributions.
What if you are below the Annual Allowance? Carry Forward
As mentioned above, the maximum that you can pay into a pension is covered by the lower of your salary or the annual allowance. If contributions are not made up to your limit fort that year, you are allowed to carry these forwards for up to three years.
See: Carry Forward
Flexible Drawdown Money Purchase Annual Allowance (MPAA)
- If you use flexible access drawdown when in retirement to access benefits, you should be aware that there is another annual allowance restriction.
- If you drawdown tax free cash lump sums only (the 25%), there is no MPAA restriction.
- If you drawdown part of the 75%, (taxable) part of the pension fund (even just £1 of it), you are then subject to the Money Purchase Annual Allowance if you work on and want to pay more into pensions.
MPAA Limits as follows:
- 2015/16 to 2016/17 = £10,000 pa
- 2017/18 to 2022/23 = £4,000 pa
- 2023/24 onwards = £10,000 pa
