Tax allowances

A pension is one of the most tax efficient ways to save, subject to certain limits.

The Annual Allowance (AA)

The Annual Allowance (AA) is the total amount you can save into your pension(s) in a year, before being subject to extra tax. From 6 April 2023, for most people, this is £60,000.

If you have unused allowance from the last three years, you could save more than £60,000 without paying additional tax. Details about how much of your AA you have used are shown on your annual benefit statement. If you exceed the AA, we will send you a Pension Savings Statement in October.

Different rules apply if you have a ‘threshold income’ of more than £200,000 or ‘adjusted income’ of more than £260,000.

Money Purchase Annual Allowance (MPAA) applies if you flexibly accessed benefits from a Defined Contribution (DC) pension after 6 April 2015. This is the maximum amount you can contribute to DC arrangements before having to pay tax and includes Scheme Money Purchase Additional Voluntary Contributions (MPAVCs). From 6 April 2023, it is set at £10,000. If it applies to you, there will be a tax charge on the excess.

Threshold income is the value of your taxable income from all sources (e.g. earnings, benefits in kind, savings interest, dividends, rental income) but excluding the value of any pension savings.

However, if you pay your contributions through Flexible Pension Savings, you must add those contributions in when you calculate threshold income. Adjusted income is the value of taxable income from the same sources but including the value of any pension savings.

The Lifetime Allowance (LTA)

Under previous legislation, the LTA was set at £1,073,100. In the March 2023 Budget, the Chancellor announced that pension savers will not have to pay penalty tax charges for going over the LTA in the 2023/24 tax year.

Please note the Lifetime Allowance (LTA) was abolished on and from 6 April 2024, to be replaced with a new system of tax-free allowances. This may impact the pensions tax relief that applies your benefits.

If you are considering taking benefits – particularly in the period that spans 6 April 2024 – it is strongly recommended that you take advice from an authorised financial adviser to understand what the new allowances mean for you. For further information please read the document ‘Changes to the Lifetime Allowance (LTA)’.

Tax-free cash limit or Pension Commencement Lump Sum (PCLS) is currently the amount of tax-free cash you can take from your pension savings. The PCLS is normally restricted to 25% of your pension savings. Although not an issue for most people, the PCLS limit will be frozen at 25% of the current LTA level (which means it will be capped at £268,275) from April 2023. Anyone with a protected right to a higher PCLS is expected to retain this right.