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.
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.