Everyone knows that the more you save for the future, the better. But when it comes to your pension, there are a few limits that will affect your contributions. In this article, we'll explain all the UK pension contribution limits that you need to be aware of.
Once, you've worked out how much you should be paying into your pension, it can be tempting to increase your payments over time. You might not be aware that there is no hard limit on pension contributions - you can add as much as you like into your pot. There is, however, a cap on how much tax relief you can get on your contributions.
Every time you pay into your pension, you'll receive a 25% tax bonus on your contribution from the government. This also applies to the self-employed and higher and additional rate taxpayers can enjoy an even greater refund via their self-assessment tax return. The government offers this bonus to encourage you to save for your future. However, there's a limit on how much you can get back.
Pension tax relief is capped by the annual allowance and a lifetime allowance.
There are two maximum pension contribution limits in the UK that put a ceiling on how much tax relief you can enjoy.
From the 2023/24 tax year, you can get tax relief on pension contributions up to £60,000 or 100% of your earned income each tax year, whichever is lower. This applies across all your pensions and includes:
For example, if you earned £30,000 a year, you can pay £24,000 into your pension each year. You'll then receive the government's 25% tax relief contribution of £6,000, making the total amount in your pot £30,000.
If your income is £60,000 or higher, then £48,000 is the maximum amount you’re allowed to contribute into your pension each year - as you'll also be receiving a £12,000 tax top-up.
If your pension contributions add up to more than this across the year, then you'll need to pay tax on the amount you’ve gone over. Essentially, you'll have to give back any tax relief you received on the excess amount. This is known as the Annual Allowance Charge (AAC).
If you aren’t employed or earn under £3,600 annually then the most you can pay into a pension is £2,880 (or £3,600 with the tax relief applied).
If you earn over £240,000 a year, you'll fall into the tapered annual allowance. For every £2 you earn above £240,000 each year, you’ll lose £1 from your annual pension allowance - up to a maximum of £36,000.
This means that anyone earning over £312,000 will have an annual allowance of just £4,000.
There’s also a maximum you can pay into pension savings over your lifetime, known as the Lifetime Allowance (LTA). The current max on pension contributions over your life (while still enjoying tax relief) is £1,073,100. This applies to your contributions and any growth on your investments.
If your savings go over this cap, you may need to pay extra tax when you come to withdraw your pension. You'll be charged 55% tax on any funds you take out above the LTA, as well as income tax at your standard rate
The government announced that from 6 April 2023 the lifetime allowance charge would be removed. The lifetime allowance will be fully abolished from the 2024 to 2025 tax year, through a future Finance Bill.
The lifetime allowance framework therefore remains in place from 6 April 2023, and it is just the lifetime allowance charge that has been removed at this stage. Further information and guidance will be issued when the lifetime allowance is completely removed from pension tax legislation.
We recommend speaking to a financial adviser to discuss your options.
In some cases, you can carry forward your unused annual pension allowance from the previous 3 years. This means you can go over your annual allowance and still receive tax relief on your contributions, up to a maximum of £120,000 (if you or your employer haven't paid into a pension at all for the last 3 tax years).
Backdating pension contributions is relatively straightforward, as long as you have had a pension open for the entire period - but there is a catch. You still won't be able to go above the other annual limit - 100% of your earnings for the year. For example, if you earn £50,000 a year, that is the maximum you'll be able to add to your pension and still get tax relief - even if you haven't used up your allowance in the years prior.