Tax information for high earners
This page provides important information for those whose income is more than £200,000 a year, or whose pension pots (in total) 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 £40,000.
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 £240,000 (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 £240,000. This is limited however – the minimum tapered annual allowance you can have is £4,000. So, if your income is over £312,000, including pension contributions, your annual allowance will be £4,000.
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 £4,000 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 the Gov.uk website. You can also read the step by step guide to annual allowance.
How much can I build up in my savings pot before incurring extra tax?
The most you can amass in your savings pot over your lifetime without incurring extra tax is currently £1,073,100. This is known as the Lifetime Allowance.
If you have more than £1,073,100 in your savings pot you could be taxed up to 55% on the excess when you come to take your benefits.
What should I do if my pension savings exceed the allowance?
If after carrying forward any unused Annual Allowance from the three previous tax years your pension savings are still above the Annual Allowance you’ll be liable for an Annual Allowance charge and you will need to tell HMRC.
Note that the Annual Allowance was calculated differently before the 2020/21 tax year. You need to use the rules applicable to the relevant tax year to work out unused Allowances.
If you normally complete a Self Assessment tax return, then you can tell HMRC about your pension savings and liability to the annual allowance charge as part of the return. You’ll need to complete the Additional Information pages of the tax return to show the amount by which your total pension input amount exceeds the annual allowance. The boxes that need to be completed for the annual allowance are in the ‘Pensions savings tax charges’ section (on the additional information pages (SA101) in the paper return).
If you haven’t completed a tax return before (or it's been some time since you did), you will need to complete a registration form to let HMRC know what's changed and to get a tax return.
If I am liable to a charge can it be paid from my pension fund?
You can use your pension fund to pay some or all of the charge if the total Annual Allowance charge liability is more than £500. If the charge is less than this, it will not be possible to use this facility with schemes administered by Legal & General. If you wish to do this please complete this form. You will need to tell HMRC about any charge you pay from your pension fund as part of your Self Assessment tax return and then contact Legal & General.
The fund value of your pension will be reduced to take account of the tax that will be paid on your behalf by the scheme, and as a result you may receive a lower income in retirement.
Any charge will be at your highest marginal rate of income tax.
Calculating the value of your pension pot
To find out if you’re likely to breach 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 2021/22 tax year. Different rates and allowances will apply to different tax years.