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The Pension Annual Allowance – and overfunding

30th November 2018

General rule

For pension contributions, there is an Annual Allowance (of £40,000 for 2018/19) which is the maximum one can pay into a pension scheme in a tax year.  If you (or your employer) don't use all of the Annual Allowance, then you can carry forward unused Annual Allowance for up to three tax years – and so make pension contributions in excess of those years’ Annual Allowance. 

Reduction when taxable income is high

If you have high levels of income - in excess of both taxable income of £110,000 and of Adjusted Income (taxable income plus Employer pension contributions) of £150,000 - then the Annual Allowance is reduced by £1 for every £2 that your Adjusted Income exceeds £150,000 - until it is reduced to £10,000 - so, the more you earn, then the less you can pay into your pension!

What happens if you accidentally overfund your pension in a tax year?

There are two ways you could do this in a year:

  • Exceed your Net Relevant Earnings

If one pays pension contributions in excess of the higher of £3,600 and one’s Net Relevant Earnings (annual salary plus benefits-in-kind, plus any self-employment income), then no tax relief is given on the excessive pension contributions – and HMRC may allow arefund of excess contributions lump sum’ to be paid back by the pension company.

  • Exceed the Annual Allowance

If one makes more contributions than the Annual Allowance allows, there is an ‘annual allowance charge’ on the excess contributions - calculated at the taxpayer's marginal rate of tax (although the pension contributions still do get tax relief). 

So, it can be worth keeping a record of contributions made in each tax year, and available Annual Allowances to carry forward.