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Contributing to a private pension explained

How the pensions annual allowance works

By Paul Davies

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How the pensions annual allowance works

Find out how much you can save into a pension each year - called your annual allowance - and how you could use a loophole to save much, much more.

Pension tax relief is a valuable incentive to motivate people to save for their retirement. 

But the government spends billions of pounds every year on tax relief and, therefore, places a cap on the amount you can save every year, upon which you can earn relief.

This cap is known as the ‘annual allowance’.

In this guide, we explain the level of the annual allowance, what happens if you exceed it – and the loophole you can use to top up your pension by tens of thousands of pounds if you haven’t used up your full allowance from previous years.

What is the pensions annual allowance in 2017/18?

Your annual pensions allowance for the 2017/18 tax year is £40,000.

This has reduced significantly over the years. Our interactive chart shows historic annual allowances over the past 11 years.

What is the tapered pensions annual allowance?

Once you earn more than £150,000, your annual allowance starts to fall. This is known as the ‘tapered annual allowance’.

The tapered allowance applies if your ‘adjusted income’ is more than £150,000. Adjusted income is your total taxable income – so salary, dividends, rental income, savings interest, plus employer contributions.

If your total adjusted income is between £150,000 and £210,000, you lose £1 of annual allowance (starting at £40,000) for every £2 of adjusted income. Once your income reaches £210,000, you’ll be left with an annual allowance of £10,000.

The table below shows how your annual allowance reduces as your income increases above £150,000.

Tapered annual allowance 2017/18
Total adjustable income Annual allowance
£150,000 £40,000
£160,000 £35,000
£170,000 £30,000
£180,000 £25,000
£190,000 £20,000
£200,000 £15,000
£210,000 £10,000

Can I carry forward my pensions annual allowance?

If you haven’t used up your annual allowance from previous years, you don’t lose them completely. A process called ‘carry forward’ allows you fill to make pension contributions to fill up any unused allowance you might have from the previous three tax years.

There are two conditions you need to satisfy to use carry forward.

First, you must earn at least the amount you wish to contribute in total this tax year (unless your employer is making the contribution).

Second, you must have been a member of a UK-registered pension scheme (this does not include the state pension) in each of the tax years from which you wish to carry forward

Carry forward: an example

Our example shows carry forward allows for a contribution of £80,000 without exceeding the annual allowance in 2017-18 (as long as you’ve earnings of at least that in the latest tax year).

 

2014/15

2015/16

2016/17

2017/18

Annual allowance

£40,000

£40,000

£40,000

£40,000

Total contribution

£30,000

£30,000

£20,000

0

Annual allowance remaining

£10,000

£10,000

£20,000

£40,000

Total amount available using carry forward

£80,000

What is the money purchase annual allowance in 2017/18?

If you’ve taken money out of your pension, you can still make contributions to a pension and earn tax relief.

But you get a lower annual allowance if you want to make further contributions. This is called the money purchase annual allowance and applies people who have taken money from a money purchase, or defined contribution, pension.

The money purchase annual allowance has been set at £4,000 for 2017/18, down from £10,000 for the previous year. This means that you’ll only receive tax relief on contributions of up to 100% of your earnings or £4,000, whichever is the lower.

Technically this £4,000 limit hasn't been introduced yet, but is in the process of going through parliament. We're monitoring this in case there are any last-minute changes. 

When is the money purchase annual allowance triggered?

The lower money purchase annual allowance is only triggered when:

To retain the full £40,000 annual allowance, you can:

If you've have triggered the money purchase annual allowance, you can't carry carry forward any unused allowances from previous years to boost the amount you can pay into your pension.

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