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 is possible to carry forward unused allowances from the three previous tax years. Special rules applied for the 2015/2016 tax year, 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 is necessary to know the pension input amount for the pension input period ending in the tax year being assessed.

From 6 April 2015 a new reduced money purchase annual allowance (MPAA) of £10,000, in respect of money purchase pension contributions, will apply to individuals who have flexibly accessed their pension benefits from this date. 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.

From 6 April 2016, a tapered annual allowance for higher earners is being introduced. Please see FAQ 'What is tapered annual allowance?'