Annual Limit for Pension Savings

In addition to tax relief limits, see Tax relief limits for pension savings, and the lifetime allowance, see Lifetime limit for pension savings, there is a limit on the total amount you are allowed to save for retirement each year before having to pay tax. This is called the annual allowance and for the 2008/9 tax year the annual allowance is £235,000. This means that the amount that you contribute to your retirement savings must not exceed £235,000 during the tax year 2008-2009, including tax relief and any scheme provider bonuses or employer contributions. Any savings exceeding this amount are subject to taxation at a rate of forty percent, known as the annual allowance charge. For more information on the annual allowance, see Annual Allowance.

For example, you earn £35,000 and you are thus entitled to receive tax relief on pension scheme contributions up to £35,000 during the tax year. You usually make pension scheme contributions of £8,000 a year, but one year you come into an inheritance of £230,000 and decide to save this in a separate retirement savings scheme. Your total retirement savings for the year are £238,000. You are also entitled to tax relief on your contributions up to the total of your salary, and so you receive tax relief of £7,700 in addition. This brings your total retirement savings to £245,700 which exceeds the annual allowance of £235,000 by £10,700. The amount that exceeds the limit is subject to taxation at forty percent; you have made retirement savings of £245,700 but must pay £4,280 in annual allowance charges. Your total retirement savings contributions for the year are £241,420.