Are you making the most of your pension Annual Allowance?

The NHS is always a prevalent topic in the news as politicians and experts discuss the best ways to keep our health services running smoothly. In recent years, pension taxation rules became an important part of that discussion as some senior clinicians planned to leave the NHS because they could no longer make tax-efficient contributions to their pensions.

A big issue was that many NHS workers regularly exceeded their “Annual Allowance” – the amount you can save in your pension each year without triggering an additional tax charge. Indeed, according to FTAdviser, 34% of people who exceeded their Annual Allowance in the 2019/2020 tax year were enrolled in an NHS pension scheme.

Consequently, the government announced changes to pension taxation rules to address this issue and allow pension savers to potentially make more tax-efficient contributions.

The Annual Allowance increased from £40,000 to £60,000 (or 100% of your earnings, whichever is lower) on 6 April 2023. This may mean that you can make more tax-efficient pension contributions than you could previously.

Unfortunately, many savers are failing to take advantage of this. Indeed, according to IFA Magazine, only a third of high net worth (HNW) individuals have increased their pension contributions since the Annual Allowance rose.

If you haven’t adjusted your own contributions, you could be missing an opportunity to build more tax-efficient retirement savings.

Read on to learn how the Annual Allowance works and how you could take advantage of the increased threshold.

The Annual Allowance limits the amount of tax relief you can benefit from

The tax relief you receive on your contributions is one of the key benefits of pension saving, and could significantly increase the value of your retirement savings over time.

When you contribute to your pension, you normally benefit from 20% tax relief at source. This means that a £100 contribution effectively “costs” you £80, and the government pays the other £20 as tax relief.

If you’re a higher- or additional-rate taxpayer, you may be entitled to 40% or 45% tax relief, which you can claim through self-assessment.

Each year, your Annual Allowance limits the amount of tax-efficient pension contributions you can make. Once you reach your Annual Allowance, any further pension contributions may trigger a tax charge.

As a result, you may not be able to continue making tax-efficient contributions to your pension once you exceed a certain threshold.

Fortunately, the increase to the Annual Allowance on 6 April 2023 might benefit you.

The Annual Allowance increased to £60,000 on 6 April 2023

In his 2023 Budget, chancellor Jeremy Hunt announced that the Annual Allowance would increase from £40,000 to £60,000 (or 100% of your earnings, whichever is lower) on 6 April 2023.

However, if you have flexibly accessed a defined contribution (DC) pension, you may be affected by the Money Purchase Annual Allowance (MPAA). This effectively reduces your Annual Allowance to £10,000.

Additionally, if your threshold income – your total income including your own and employer pension contributions – is more than £200,000 and your adjusted income – your income excluding pension contributions – is more than £260,000, you may trigger the Tapered Annual Allowance. This reduces your Annual Allowance by £1 for every £2 of income that exceeds £260,000, down to a minimum of £10,000.

If you’re not affected by the MPAA or the taper, the increase to the Annual Allowance might benefit you as it means that you’re able to make more tax-efficient contributions to your pensions.

According to IFA Magazine, 42% of HNW individuals said they planned to take advantage of the increased Annual Allowance. Yet, in the year since it came into effect, only a third contributed more than £40,000 and just 8% contributed more than £50,000.

If you can afford to contribute more than £40,000 to your pension each year but you haven’t increased your contributions since the Annual Allowance changed, you could be missing a valuable opportunity to benefit from more tax relief.

Using your full Annual Allowance could make you more than £386,000 better off in retirement

Taking advantage of the new Annual Allowance by increasing your contributions could significantly increase the size of your pension pot in later life.

According to the Which? pension contribution calculator, if you’re a 50-year-old earning £150,000 and paying £40,000 a year into your pension, you would have a projected pot of £944,904 at age 67. This assumes an existing pot of £50,000, employer contributions of 3%, annual growth of 6%, and annual management fees of 0.75%.

However, if you increased your annual contribution to £50,000, your pot could be worth £1,138,201 at age 67.

In this example, if you used your full annual allowance of £60,000, your pension pot could grow to £1,331,499 – an increase of more than £386,000 compared with contributing up to the old Annual Allowance of £40,000.

If you’re an additional-rate taxpayer, you are entitled to 45% tax relief. Consequently, contributing an extra £20,000 to your pension each year would only “cost” you £11,000, as you benefit from £9,000 a year in tax relief from the government.

This is a large amount of tax relief you could potentially be missing out on. So, even if you can’t afford to use the full Annual Allowance, you may want to consider increasing your pension contributions.

You may be able to carry forward unused Annual Allowance from the past 3 years

In certain circumstances, you may be able to carry forward unused Annual Allowance from the past three years. However, there are several conditions you must satisfy first. Before you can use “carry forward” you must have:

  • Used your full Annual Allowance for the current tax year
  • Been a member of a UK-registered pension scheme in each of the years from which you want to carry forward.

Additionally, you can’t contribute more than 100% of your earnings in the tax year that you wish to make the contributions.

You may be able to use the carry forward rule to increase the tax-efficient contributions you can make to your pension if you didn’t use your full Annual Allowance in any of the past three years.

However, the rules can be complicated so you may want to seek professional guidance to avoid accidentally triggering a tax charge.

Get in touch

We can help you take full advantage of the tax benefits of your pensions.

Please contact us at or call 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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