Contribution Limits

Before the A-day (6 April 2006) changes were made, you were only permitted to contribute a certain percentage of your final salary to your pension, and there was a limit to the amount you could get tax relief on. However, now you can contribute as much as you want into any number of pension plans (company and/or personal) each year, and there is no upper limit to the total amount of pension saving you can build up. In fact, you could contribute all your salary to your pension plan if you wish.

Even though there is no limit on the amount of pension saving you can build up in a pension plan, there is a limit on the tax relief given on the amount paid into your pension plan. The maximum tax relief you can receive each year will be 100% of your earnings, but subject to an annual allowance and a lifetime allowance. But if you have few or no earnings, you can receive tax relief on up to £3,600 a year.

Lifetime Allowance (LTA)

Pension savings are also subject to a maximum lifetime allowance on the value of your pension fund, above which will be taxed by the new Lifetime Allowance Charge. If you take benefits above your lifetime allowance as a lump sum, the charge will be 55%. If you take benefits above your lifetime allowance as a pension, the Lifetime Allowance Charge on the excess amount will be 25%. This charge will apply in addition to the usual Income Tax due on pension payments.

When first introduced, the lifetime allowance stood at £1.5 million, which increased to £1.8 million in 2010/2011. Like the annual allowance, this figure will be frozen until 2015/2016, and then will be reviewed every 5 years. This figure not only includes the amounts paid in, but also all the interest or investment growth that has built up dusring this time.

Annual Allowance (AA)

The annual allowance applies to the increase in the pension fund and includes contributions made by you and your employer. If the annual allowance is exceeded, then the extra pension savings must be declared and the annual allowance charge paid through Self-Assessment.

Pension savings are subject to an annual allowance, above which contributions will be taxed at 40%. An allowance of £220,000 a year was set in 2006/07, which rose to £255,000 in the 2010/11 tax year. This amount will be frozen until 2015/16, and then it will be reviewed every 5 years.