Saving into a pension is a really great way to save for your retirement but you need to be aware of the pension contribution limit. That’s right, there are rules for how much you can pay into a pension and you don’t want to get caught out.
The reason why saving into a pension is so great is because every time you pay in, the government put their hand in their pocket and pay into your pension as well. Generous eh? Well not quite, technically what the government pay in is a refund of tax (called tax relief) you have previously paid, but it’s still better than no top up.
If you’re a basic rate taxpayer (20%) then the government will top up your pension contribution by 25%. 
Example:
Pay £80 into a pension, the government will top this up to £100.
If you’re a higher rate taxpayer (40%) then the government will top up your pension contribution by 25% and then you can claim a refund from the tax office for a further 20% of the total pension contribution.
Example:
Pay £80 into a pension, the government will top this up to £100. You can then claim a further tax refund of £20 from the tax office (HM Revenue and Customs).
Confirmation of the pension contribution limit
The pension annual allowance is currently £40,000 per year. Sounds simple right? Well unfortunately as with most government tax policies it is actually a bit more complicated than this.
To try and keep it as simple as possible I have broken down three scenarios, as most people will fit into one of these:
#1 Not working or earning
If you have not worked and have no earnings from work in the tax year you wish to pay into a pension then your pension contribution limit will be £2,880. This will still be topped up by the government to £3,600.
#2 Employed
If you work for a company and earn a regular salary then you can contribute up to 100% of your gross salary (before Income Tax) or £40,000 whichever is lower.
Example 1:
If you earn £30,000 gross, your pension contribution limit is £24,000 and this will be topped up by the government to £30,000.
Example 2:
If you earn £50,000 gross, your pension contribution limit is £32,000 and this will be topped up by the government to £40,000.
#3 Company owner
If you run your own company then you are in the unique position of being able to make ‘employer’ pension contributions straight from your business bank account into your pension.
This is a good thing because it’s classed as a business expense and therefore you don’t pay any Corporation Tax, personal Income Tax or employers/employee National Insurance.
Your pension contribution limit is still up to 100% of gross earnings or £40,000 whichever is lower however you do not need to factor in the government top up as you have already benefited from this via not paying Corporation Tax.
Example:
If you have £40,000 sitting in your company bank account, you can pay up to £40,000 straight into your pension.
Other factors that affect the pension contribution limit
When considering making a pension contribution you also need to consider:
Pension contributions from your employer
- You need to add these to your own pension contributions as they both count towards the pension contribution limit.
Auto enrolment
- You may have your own personal pension but don’t forget about auto enrolment.
- Your employer legally has to contribute to a pension on your behalf so don’t forget to add these contributions to your overall total as above.
Reduced pension contribution limit for high earners
- If your earnings plus employer pension contributions are more than £150,000 the £40,000 annual allowance reduces.
- This is called the Tapered Annual Allowance.
Already accessed your pensions
- If you have already withdrawn from your pensions on a flexible basis then you will be limited to what you can pay back into pensions.
- This is called the Money Purchase Annual Allowance and is reducing from £10,000 per year to £4,000 per year.
Using allowance from previous years
- If you have been a member of a pension scheme for the last 3 years but did not use your full £40,000 allowance for those years you may be able to carry forward and use it this year providing you have the relevant earnings.
Final salary pensions
- If you are still a member of a final salary pension that is still open then be careful as there are different rules for how to work out contributions for these types of pensions.
- It is not as straightforward as working out what you have actually contributed.
Summary
So the headline pension contribution limit is simple but when you look at the detail it is far from it. The good news is the government have provided an annual allowance calculator on their website.
If you are a high earner and looking to make large pension contributions then I recommend professional advice. We do not charge for a phone call or an initial meeting. If you mistakenly contribute more than the pension contribution limit the tax penalties can be severe so don’t get caught out. Call us today!
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