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Tax information for higher earners

If you earn more than £100,000 a year, or have a pension pot that could reach £1,030,000 at retirement, your tax and allowances will be different to those who earn less. This page provides important information which you may find helpful when planning your finances.

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 £110,000 (your income excluding any pension contributions – unless they’re paid as a salary sacrifice by your employer)
  • your ‘adjusted income’ is over £150,000 (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 £150,000. This is limited however – the minimum tapered annual allowance you can have is £10,000. So, if your income is over £210,000, including pension contributions, your annual allowance will be £10,000.

If you have 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.

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 HMRC’s  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 .

How much can I build up in my pension pot before incurring extra tax?

The most you can amass in your pension pot over your lifetime without incurring extra tax is currently £1 million. This is known as the Lifetime Allowance.

If you have more than £1,030,000 in your pension pot you could be taxed up to 55% on the excess when you come to take your benefits.

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.
 

What do you think?

How much do you think your pension pot(s) will add up to at retirement?
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Will you be affected by the Lifetime Allowance limit? How much do you think your pension pot(s) will add up to at retirement?
Under £1,030,000
You won’t be affected by the lifetime allowance limit.
£1,030,000
or more
You will be affected by the lifetime allowance limit.
If you have a pension pot which you think may exceed the £1 million limit, or you’re on track to get around £40,000-£50,000 a year from a final salary/defined benefit scheme, you may wish to take action to minimise any tax liability.

The lifetime allowance limit was reduced from £1.25 million to £1 million in April 2016 - in certain circumstances, you may be able to protect your pension pot(s) from this reduction. If you have an older pension pot, you may have been able to protect a higher amount but most of those forms of protection are no longer available.

For further information on protecting your lifetime allowance, please visit the Gov.uk website .

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