The lifetime allowance is the maximum amount of pension and/or lump sum that benefits from tax relief. The lifetime allowance is currently set at £1,073,100. The annual allowance for tax relief on pensions is currently £40,000 and there is a three year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years. 

If you have a reduced (tapered) annual allowance the first step is to calculate your net income. Your net income is your taxable income for the year less any tax reliefs such as payments made to your pension scheme that had tax relief but were paid before the relief was applied. You will also need to quantify your pension savings, threshold income and adjusted income.

Those with an adjusted income over £240,000 will begin to see their £40,000 annual allowance tapered. For every complete £2 income exceeds £240,000 the annual allowance is reduced by £1. In recent years, both the annual and lifetime allowances have been gradually reduced removing the amount of tax relief on pensions available to high earners.

The new Pensions Scheme Act received Royal Assent on 11 February 2021. The Act covers a number of important pensions-related issues and has faced a long journey through parliament, starting in October 2019, that included delays due to both Brexit and the coronavirus pandemic.

The Act has been described by government as ‘the biggest shake-up of UK pensions for decades. The Act will provide for enhanced powers for the Pensions Regulator, including the power to impose civil penalties of up to £1 million and three new criminal offences.

One of new criminal offences, that could result in up to seven years in prison, will target bosses who run pension schemes into the ground, or plunder pots to line their own pockets. This is expected to strengthen the regulators’ powers to take efficient and timely actions to protect members’ hard-earned savings.

The legislation also introduces a new pensions dashboard creating one single platform to access and review pension pots, and the creation of new style collective defined contribution (CDC) schemes. CDCs have the potential to increase returns for millions, whilst being more sustainable for both workers and employers.

The Act also aims to ensure that pensions help with climate change governance by moving towards a net zero future through climate risk reporting.

The measures in the Act will come into force at different times as secondary legislation is introduced.

The annual allowance for tax relief on pensions has been fixed at the current level of £40,000 since 6 April 2014. The previous allowance was £50,000 and prior to 6 April 2011, the annual allowance was as high as £255,000.

The annual allowance is further reduced for high earners. Those with income in excess of £150,000 will usually have their allowance tapered. For every complete £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.

The reduction in the annual allowance over recent years has meant that more and more taxpayers are exceeding their annual pension allowance and have tax to pay. Taxpayers will usually receive a statement from their pension provider telling them if they go above their annual allowance. This can be more complex if they have more than one pension scheme. Any additional tax due can be declared and paid as part of their Self Assessment. If the tax is more than £2,000 taxpayers can ask their pension scheme to pay the charge to HMRC from their pension pot. This means that their pension scheme benefits would be reduced.

Planning note

There are a number of ways to minimise any tax to pay. This can include:

• utilising the three year carry forward rule that allows taxpayers to carry forward unused annual allowance, and
• examining alternative savings strategies.

There is also a pensions lifetime allowance that should be monitored which is currently £1.03 million.

Employer contributions to any type of pension arrangement in a registered pension scheme are always paid gross. Tax relief is given by deducting the gross amount of the contributions from an employer’s taxable profits before Corporation Tax is calculated.

Employers’ contributions can normally be treated as a deduction for the accounting period in which the contribution is paid by the employer. The only exceptions are where the deduction is required to be spread over a number of periods or the deduction is allowed for an earlier period.

HMRC may require the tax relief to be spread over more than one period of account where there is an increase over 210% in the level of employer contribution from one period to the next. If the ‘spreading rules’ apply, the relief due to an employer on the making of a contribution to a registered pension scheme is not given entirely in the chargeable period in which the payment is made. Instead, part of the relief due is spread forward into future periods. This is a specialist area and advice should be taken before any payment is made.

Anyone aged 16 or over and at least 30 days from their State Pension age can request a State Pension statement from the Department for Work & Pensions (DWP). The statement provides an estimate of how much State Pension they can expect to receive when they reach State Pension age. The estimate is based on the applicant’s National Insurance Contribution record as it stands on the date the statement is produced.

An application can be made online, by post or by telephone. The statement is usually sent within 10 working days from the time the DWP receives the application. The statement also includes information explaining what effect further qualifying years may have on the amounts shown in the statement.

The statement includes the date the taxpayer will reach their State Pension age based on the current law. The State Pension age is regularly reviewed and may change in the future. The estimate does not take account of future payments.

Please note

If you do not have 10 qualifying years of contributions the statement will only tell you how many qualifying years you currently have. Taxpayers are usually required to make a minimum of 10 qualifying years to qualify for at least a part of their State Pension entitlement.

It is worth undertaking a regular check to help optimise your entitlement to the State Pension. You should also consider what other savings or pensions might be required to fund your retirement.