Tax and pensions

If you make your own contributions to your pension, the Government will boost your savings in the form of tax relief. You may not currently be making contributions to the Scheme/Plan, but you will be entitled to tax relief if you are making contributions to another pension arrangement.  

There is a limit on how much your pension can grow each year while you receive full tax relief. This is known as the annual allowance and is currently £60,000.  Any unused annual allowance can be carried forward for up to 3 years. A lower limit may apply if you are already taking your benefits from a pension plan/scheme (you will have been notified if this is the case) or your income for the year exceeds £260,000.

For the Scheme/Plan the value of your benefits you build up in the year is compared against the annual allowance.  If you contribute to any other scheme/plan a different test may apply for that scheme/plan.

If the growth in your pension exceeds the annual allowance, then tax may apply and it will be up to you to declare this on your self-assessment tax return.

In the March 2023 Budget the Chancellor of the Exchequer announced that the Lifetime Allowance would be abolished from 6 April 2024 and replaced with new allowances known as the Lump Sum and Death Benefit Allowance and the Lump Sum Allowance.  

The Lump Sum and Death Benefit Allowance is the total amount of tax free lump sum benefits you can receive from all your pension schemes in all circumstances. For most people the Lump Sum and Death Benefit Allowance is set at £1,073,100.

If you have certain protections in place under the old Lifetime Allowance regime (in respect of benefits built up before 6 April 2024) then you may have a different Lump Sum and Death Benefit Allowance amount. See the section entitled “Your pension savings may already be protected” for more information. 

The Lump Sum Allowance is the maximum amount of lump sum that you can take at retirement from all your pension scheme benefits without being charged additional tax. The Lump Sum Allowance is £268,275 for most people. Again, if you have certain protection in place under the old Lifetime Allowance regime then you may have a different Lump Sum Allowance amount.

From 6 April 2024 there is no additional tax charge where benefits in excess of the Lump Sum and Death Benefit Allowance and the Lump Sum Allowance are taken as pension. 

Benefits in excess of the Lump Sum and Death Benefit Allowance and the Lump Sum Allowance which are taken as a lump sum will be taxed at your marginal tax rate through the Pay As You Earn system.

The previous Lifetime Allowance regime was introduced in 2006 and was subsequently reduced in 2012 and again in 2014 and 2016 before increasing between 2018 and 2020. The Lifetime Allowance remained at the current level of £1,073,100 until April 2024 when it was abolished and replaced with the Lump Sum and Death Benefit Allowance and the Lump Sum Allowance.

Each time the Lifetime Allowance reduced, people who had already planned their pension savings on the basis of the higher Lifetime Allowance could protect their pension savings by applying to HMRC and should have received a notification from HMRC confirming their protection if they did so.  

From 6 April 2024 any protections previously applied for will now count towards your Lump Sum and Death Benefit Allowance and the Lump Sum Allowance. However, you may still be subject to additional tax if your pension benefits exceed your protected allowances and you take those excess benefits in lump sum form, or if you lose this protection.

You can find more information about how to do this along with other information about the existing protections and when these may be lost at https://www.gov.uk/guidance/taking-higher-tax-free-lump-sums-with-lifetime-allowance-protection .  

Once you retire, your pension will become your income and Income Tax will be deducted at your normal rate before it is paid to you.  Details of current Income Tax rates and Personal Allowances can be found here https://www.gov.uk/income-tax-rates .  

The maximum tax free cash lump sum you can take is normally 25% of the value of your pension. This is also known as a Pension Commencement Lump Sum and the maximum most people can take from all their pension schemes combined is usually £268,275. This is currently paid tax-free and if you are able to take more, anything above this amount will be subject to tax payable through PAYE at your marginal rate.

You can take less than this maximum if you want. The more you take as a tax free Pension Commencement Lump Sum then your regular pension income amount may be reduced accordingly.

You can get more information about tax allowances from HMRC at the following link: https://www.gov.uk/tax-on-your-private-pension.

It was announced in the Autumn Budget 2024 that, starting from 6 April 2027, the Government intends that most unused pension funds and death benefits will be counted as part of a person’s estate for Inheritance Tax purposes. HMRC have launched a consultation to assist them in deciding on the most suitable system for reporting and paying any Inheritance Tax due on these pensions. Further details are expected to be announced following the completion of HMRC’s consultation.