What is the annual allowance?

The annual allowance is the maximum amount of pension savings an individual can have each year that benefits from tax relief. In practice, an individual is subject to a tax charge (the annual allowance charge) where their pension savings exceed their available annual allowance for a tax year although it's possible to carry forward unused allowances from the three previous tax years. For more information on this please speak to a financial adviser. The annual allowance for the 2016/17 tax year onwards is £40,000. To measure the contributions paid against the annual allowance, it's necessary to know the pension input amount for the pension input period ending in the tax year being assessed. The value of any tax relief depends on your individual circumstances.

For the 2016/2017 tax year, the money purchase annual allowance (MPAA) will be £10,000, in respect of money purchase pension contributions and will apply to individuals who have flexibly accessed their pension benefits from this date. The government is consulting on its proposal to reduce the MPAA from £10,000 to £4,000 with effect from 6 April 2017.

In addition to the MPAA, a person can still accrue benefits in a defined benefit arrangement. If the MPAA is not exceeded, then the combined total of all the pension savings that can be made will be subject to the £40,000 annual allowance. Special rules apply in the first year that the reduced MPAA first applies to the individual.

A tapered annual allowance for higher earners was introduced in April 2016. Please see FAQ 'What is tapered annual allowance?'(Opens new window)