When it comes to pension contributions you’ve probably had clients ask what’s the most they can pay in. The technically correct short answer is that there is no limit.
However, what most people really want to know is how much can be contributed with the benefit of tax relief, and without incurring tax charges. Answering this more nuanced question is far from straightforward, as it will depend on a number of factors that may include earnings, who is making the contribution, which annual allowance applies, how much of that allowance is available and if there is any carry forward.
This article looks at these factors and covers what happens when allowances are exceeded, along with how any resulting tax charges can be paid.
Personal contributions
Personal contributions of up to 100% of relevant UK earnings in the tax year that the contribution is made will qualify for tax relief. Relevant UK earnings most obviously include employment earnings – basic salary, overtime, bonus, commission, self-employed income and any statutory sick pay or maternity or paternity pay paid via the employer. Income derived from a trade, profession, or vocation also count, whether it is on an individual basis or as a partnership. Income arising from patent rights such as royalties can also be included.
Notably income from pensions or investments do not count as earnings.
It is also possible to contribute up to £3,600 a year (known as the basic amount) and get tax relief, even if earnings are below this level, or there are no earnings at all. The main caveat is the member must be under age 75, as no tax relief is given after the 75th birthday on personal pension contributions, regardless of earnings.
There is no ability to carry forward tax relief from one year to another, either relating to earnings or the basic amount. So, if an individual has relevant UK earnings of £50,000 in the tax year, that is the maximum personal contribution they can make and get tax relief on. It doesn’t matter if they haven’t made contributions for a few years but have had earnings, it is only possible to get tax relief on contributions up to the earnings in the year that the contribution is made.
It is theoretically possible to make higher levels of contributions without tax relief, but in practice most providers only accept relievable personal pension contributions.
A client with £300,000 salary could contribute the full amount as a personal contribution and receive tax relief on the whole sum – however at least some of this would be subject to an annual allowance charge (see below).
Employer contributions
There is no fixed limit on employer contributions, and the level of contribution that can attract tax relief is not linked to the employee’s earnings. Instead, the contribution must meet the “wholly and exclusively” rules. Like most other business expenses, in order to be tax deductible, the contribution must be wholly and exclusively for the purposes of the trade. This means the tax relief comes in the form of paying less corporation tax.
Broadly speaking this means the contribution will be allowable where it is part of a remuneration package that is line with the value of the work that individual does for the employer. In the case of directors and family members this may be examined more closely, but the same principle applies.
Put simply – does the individual add that value to the business? When deciding if the contribution meets the rules, it is the whole remuneration package that is considered.
In the unlikely event of the local inspector of taxes questioning the level of contribution, it would be a matter for discussion between HMRC and the company accountant, not the pension scheme. If for any reason the employer couldn’t claim tax relief, this alone would not allow them to have the contribution returned from the pension.
Although there is no limit on tax relief for employer contributions provided the wholly and exclusively rule is met, the annual allowance still applies.
This means that if an employer contribution was made which resulted in the employee exceeding their available annual allowance, although the employer could still get full tax relief, it could result in a tax charge for the employee personally.
Annual allowance
The annual allowance is a cap on the total amount paid into all pensions for an individual’s benefit in a single tax year. It includes money paid in personally plus the associated tax relief from HMRC that goes directly into the pension, any contributions paid in by the employer, and those paid by anyone else (again plus the tax relief received direct into the scheme). If benefits are being built up in a defined benefit or final salary pension scheme, the value of the benefits accrued each year also count.
For most people the annual allowance is £60,000. However, anyone with high income – over £200,000 a year from investments as well as earnings – may have their annual allowance tapered to a lower amount. The maximum taper reduces the allowance to £10,000 for individuals with adjusted income above £360,000.
Once pensions have been flexibly accessed the lower money purchase annual allowance (MPAA) of £10,000 may apply to contributions to defined contribution pension schemes. If only the tax-free element of a pension is accessed, or a secure income is taken in the form of an annuity or scheme pension, then the full £60,000 annual allowance is still available.
When calculating how much of the annual allowance has been used up its important to include all pension contributions, including tax relief paid by HMRC directly into the pension and accrual in defined benefit schemes. Auto-enrolment contributions can often get overlooked.
If pension savings of more than the annual allowance are made in one tax year, then an annual allowance charge may apply. This isn’t always the case though, as it may be possible to carry forward unused allowances from up to three previous tax years.
Carry forward
To carry forward unused annual allowance from an earlier tax year, the client must have been a member of any registered pension scheme in the tax year they want to carry forward from. Usually, annual allowance can be carried forward from the three tax years immediately before the current tax year. The full allowance from the current year must have been used up first.
Carry forward can be used by clients who are subject to the annual allowance taper, but they must have used up their tapered annual allowance in the current tax year first.
Carry forward cannot be used in relation to defined contribution pension schemes where the MPAA has been triggered, however it is still possible to carry forward in relation to defined benefit accrual.
Annual allowance charge
The annual allowance charge applies when the total pension input amount in the tax year exceeds the available annual allowance, with the excess being known as the “chargeable amount”.
To calculate the annual allowance charge the chargeable amount is added to the individual’s income for the year, and then income tax is applied. This means that there is no set rate of tax for the annual allowance charge as it could fall across different tax bands.
If only personal contributions have been made in the tax year, then effectively the charge will cancel out the tax relief on contributions made above the available allowance. It is vital that higher and additional rate taxpayers claim their higher/additional relief via self-assessment in the usual way, so the annual allowance charge is offset against this.
However, if the employer has made contributions that have caused the annual allowance to be exceeded it does mean the employee will suffer an annual allowance charge whilst the employer can still claim a deduction for corporation tax.
It is important to note that if it is discovered that the annual allowance has been exceeded contributions cannot simply be “undone”. If the scheme allowed the contribution to be returned, HMRC is likely to view this as an unauthorised member payment and apply tax charges. Neither would the repayment alter the fact that the contribution had been made – so the annual allowance would still have been exceeded and the annual allowance charge would apply.
Paying the charge
Anyone who has exceeded any of the annual allowances is required to report this to HMRC by completing a self-assessment tax return, even if they have not previously completed a return. They will need to complete the ‘Additional Information’ pages of the tax return (pages SA101 in the paper return). The boxes that need to be completed are in the ‘Pensions Savings Tax Charges’ section.
Payment of the charge is due alongside any other tax on the self-assessment.
However, it may be possible for the charge to be paid by the pension scheme.
If the annual allowance charge for the tax year exceeds £2,000, and the pension input amount for the pension scheme concerned exceeds the standard £60,000 annual allowance, then providing the member notifies the scheme by 31 July in the tax year two years after the tax year to which the annual allowance charge relates, then the scheme must pay it under “scheme pays”. For example, for a charge relating to the 2023/24 tax year, the notification must be received by 31 July 2025.
However, the deadline is extended if the charge arises because of a retrospective change of facts. Where the member has received information from the scheme administrator about a change in the pension scheme input amount the deadline is extended to the earlier of three months after notification and six years after the end of the tax year concerned.
When the conditions for “scheme pays” have not been met, for example if it is the tapered annual allowance or MPAA that has been exceeded, then the scheme may still be able to pay the charge under “voluntary scheme pays”, although they cannot be compelled to do so. There are no deadlines for voluntary scheme pays, no minimum amounts, and the charge does not have to be related to contributions made to the same scheme that is paying the charge. This means that if an annual allowance charge is discovered a few years after the event, it may still be possible to be paid from the pension if the scheme allows. However, if the usual self-assessment deadlines are not met then late payment penalties could arise.
Whether the scheme pays on a compulsory or voluntary basis, both would need to be noted in the self-assessment “Pensions Savings Tax Charges” section. You can view HMRC’s help sheet (link text: HS345 Pension savings — tax charges (2024) - GOV.UK) on their website, which has more information on this matter.
