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 tax may apply and it will be up to you to declare this on your self-assessment tax return.

The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.

The lifetime allowance was originally £1.5 million in 2006 but has been both increased and reduced at various times.     

From 6 April 2023 if you take more than £1,073,100 from your combined pension savings, you may face a tax charge. 

In the March 2023 Budget the Chancellor of the Exchequer announced that from 6 April 2023 there would be no tax charge where benefits in excess of the lifetime allowance are taken as a pension.  It was also announced that the lifetime allowance would be abolished from 6 April 2024.  

From 6 April 2023 there is no tax charge where benefits in excess of the lifetime allowance are taken as pension. 

Benefits in excess of the lifetime allowance which are taken as a lump sum will be taxed at your marginal tax rate through the Pay As You Earn system. 

The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. Your pension scheme/plan administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme/plan administrator(s) for more information.

The lifetime allowance was introduced in 2006 and was subsequently reduced in 2012 and again in 2014 and 2016 before increasing between 2018 and 2020.  It is currently intended that the lifetime allowance will remain at its current level until April 2024 when it will be abolished. 

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.  

However you may still be subject to additional tax if your pension benefits exceed your protected lifetime allowance 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/tax-on-your-private-pension. 

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.

You can also take up to 25% of the value of your benefits within the lifetime allowance as a tax-free lump sum once you retire.  For the tax year 2023/24 the lifetime allowance is £1,073,100. 

As part of the March 2023 budget it was announced that the lifetime allowance will be abolished.  When this happens the maximum tax-free lump sum available on retirement will remain at its current level of £268,275. 

You can get more information about tax allowances for both the annual and lifetime allowance from HMRC at the following links:

Lifetime allowance: https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance.  

Annual allowance: https://www.gov.uk/tax-on-your-private-pension/annual-allowance.