The UK annual allowance is a limit imposed by HMRC on the amount of tax relief available for pension contributions in any one tax year which, for UK tax purposes runs from the 6th of April to the 5th of April the following year. This applies to both defined contribution (money purchase) and defined benefit (final salary) pension schemes.The only other limit governing how much you can contribute into a pension scheme is your annual taxable income.
Although the annual allowance rate for 2015/2016 is £40,000 most people’s personal annual allowance is substantially higher due the rule stipulating that any unused allowance in the previous 3 tax years can be carried forward.
Any pension contributions in excess of your annual allowance are subject to an annual allowance charge. This has the effect of clawing back any tax relief or tax rebate received on the excess pension contributions.
To establish your personal allowance you require to know your pension contributions for up to 7 tax years to make the necessary calculation. To reduce the complexity you will find below;
This calculator will quickly provide the absolute minimum allowance that you are entitled to. However, if you intend to make a higher pension contribution we advise you to consult the accurate annual allowance calculator below
The pension contribution figure which should be used for assessment purposes is your gross contribution. Due to tax relief at source most defined contribution schemes will automatically refund lower rate tax (20%). Therefore, each £80 contribution made by you will have £20 added by the UK Government. You should also account for any pension contributions made on your behalf (for example, by your employer). For defined benefit schemes you should request the pension input amount from your employer. This is the monetary value of any benefits accrued over the tax year in question.
Most people will not be close to breaching their annual allowance. Therefore, if you have no intention of maximising your pension contribution then the following shows the minimum annual allowance that you will be entitled to this tax year (2015/2016);
- If you withdraw money from a defined contribution pension between 6th April 2015 to the 5th April 2016 then your annual allowance is £10,000. This cannot be increased under any circumstance
- Otherwise your minimum allowance is £40,000
This allowance may be increased further for each tax year when you have held a qualifying UK pension scheme, which can be either a UK register plan or a qualifying overseas pension scheme e.g. a QROPS, by carrying forward any previously unused allowance. Any reclaimable allowance can be carried forward for a maximum of 3 tax years.
If you have held a qualifying pension in the preceding 3 tax years and contributed less than the annual allowance each year then;
- minimum allowance is £180,000 less your pension contributions since 6th April 2012
Tax year 2014/2015 = £40,000
Tax year 2013/2014 = £50,000
Tax year 2012/2013 = £50,000
Tax year 2011/2012 = £50,000
Tax year 2010/2011 = £255,000
Tax year 2009/2010 = £245,000
Tax year 2008/2009 = £235,000
Tax year 2007/2008 = £225,000
Tax year 2006/2007 = £215,000
Otherwise, for 3 tax years working backwards until your pension contributions exceed the annual allowance, add to the 2015/2016 allowance of £40,000;
- the annual allowance for that tax year less any contribution made (starting with tax year 2014/2015). This applies only if you held a UK pension in the tax year in question
Alternatively, if you are either likely to exceed your minimum annual allowance mentioned above or you wish to know the maximum pension contribution you can make and still receive tax relief on the full amount then it is important to accurately calculate your allowance.
Failure to do so may result in a pension contribution in excess of your annual allowance. This should be avoided for two reasons: the tax benefits of a pension scheme will not apply on the excess contributions thereby nullifying the main benefit offered by a pension; and secondly, due to most pension schemes providing at least the basic tax rate relief at source (20%), you may become liable to future penalties if you forget to refund the tax relief to HMRC via your Self Assessment Form (tax return).