Tax information for higher earners
This page provides important information for high earners or those who have pension pots that could reach £1,073,100 at retirement.
How much can I pay into my pension plan and still receive tax relief?
You can normally pay the equivalent of your annual salary into your company pension plan each year and still get tax relief. However, there is an Annual Allowance and if you go beyond this, you will incur a tax penalty. The Annual Allowance is currently £60,000.
This allowance applies across all schemes you belong to, and includes all contributions paid by you or anyone else on your behalf – including your employer.
You’ll have a reduced (‘tapered’) annual allowance if both of the following apply:
- your ‘threshold income’ is over £200,000 (your income excluding any pension contributions – unless they’re paid as a salary sacrifice by your employer)
- your ‘adjusted income’ is over £260,000 (your income added to any pension contributions you or your employer make).
If these apply to you, your annual allowance will drop by £1 for every £2 your adjusted income goes over £260,000. This is limited however – the minimum tapered annual allowance you can have is £10,000. So, if your income is over £360,000, including pension contributions, your annual allowance will be £10,000.
If you have pension benefits in a defined benefit or final salary scheme, they may also count towards your allowance. You should ask your scheme administrator if you think this might apply to you.
I’ve started to take some of my pension benefits, can I still pay into a pension?
If you have started to take your pension benefits, the amount you can pay into your pension may be limited to £10,000 a year irrespective of how much you earn. This is called the money purchase annual allowance. You would also lose the right to carry forward any unused allowance.
You can use H M Revenue & Customs (HMRC) annual allowance calculator to check if you have to pay tax on your pension savings, or if you have any unused annual allowances that you can carry forward. For more information on annual allowances please visit Gov.uk.
How much can I build up in my pension pot before incurring extra tax?
The Lifetime Allowance is the maximum amount of pension savings you can build up over your working life without having to pay any additional tax. In recent years it has been frozen at £1,073,100. The lifetime allowance will still exist until April 2024; however, the lifetime allowance excess charge will not apply if you exceed this allowance during the 2023/24 tax year. Any excess will instead be taxed at your marginal rate of income tax. The lifetime allowance will be removed completely from April 2024.
Calculating the value of your pension pot
To find out if you’re likely to exceed the pension lifetime allowance, you need to add up the value of all your private and workplace pensions excluding any State Pension entitlement:
For personal pensions, SIPPs and money purchase or defined contribution schemes, you simply use the value of your pot.
If you have a final salary or defined benefit pension scheme, you need to use 20 times the annual pension payable plus any additional tax-free cash you’re entitled to.
If you’re already taking a pension from other schemes via an annuity, drawdown or occasional lump sum withdrawals, these need to be taken into account too.
If you have any questions about these allowances and what it means for you, you can call our specialist helpline on 0345 070 2983. Call charges will vary. We may record and monitor calls.
This information is based on the rates and allowances applicable in 2022/2023 tax year. Different rates and allowances will apply to different tax years.