Annual Allowance

Everyone who contributes to a pension savings scheme, whether they pay UK taxes or not, is also subject to an annual saving allowance. This annual allowance indicates the amount of money that you are allowed to save each year for your pension without it being subject to tax. For the tax year 2007/2008, this annual allowance is set at £225,000 per person. This means that you are allowed to save up to £225,000 over the year in your pension savings scheme and you will not be required to pay tax on any of it. This annual allowance is your total allowance: this means that the total amount of money that you save in your pension savings schemes, including your tax relief and any extra bonuses you receive from your scheme provider, cannot exceed this amount if you wish to avoid charges.

Any pension contributions, tax relief or extra bonuses from your scheme provider which exceed this annual allowance are subject to the annual allowance charge. This is currently set at forty percent of the total amount exceeding the allowance. This means that if your pension savings for the tax year 2007/2008 total £240,000, £15,000 more than the £225,000 annual allowance, this £15,000 is subject to the forty percent annual allowance charge. You would be charged £6,000, reducing your total contributions for the year to £236,000.

The annual allowance currently increases each year. For the tax year 2008/2009 the annual allowance is £235,000. If you earn £235,000 in the tax year 2008/9, you are entitled to make retirement savings contributions over the year to a total of £235,000 including tax relief and any scheme provider bonuses or employer contributions. You could contribute a maximum of £183,300 to your retirement savings, earning tax relief of £51,700 and thus bringing your total retirement savings for the year to £235,000.

If you earn more than £235,000 in the tax year 2008/9 you can make retirement savings contributions that exceed this amount but your tax relief will be limited to retirement savings up to this amount, and any contributions exceeding this amount will be subject to the annual allowance charge. For example, you earn £300,000 over the tax year 2008/9. You are entitled to tax relief on retirement savings up to the annual allowance of £235,000 including tax relief and any scheme provider bonuses and employer contributions. You could contribute a maximum of £183,300 to your retirement savings, earning tax relief of £51,700 and thus bringing your total retirement savings for the year to £235,000. Any contributions that exceed this amount, for example contributions of £200,000 will not be eligible for any further tax relief. The maximum you can contribute for which you can continue to receive tax relief is £183,300. In addition, any retirement savings contributions you make which exceed the £235,000 annual allowance for the year will be subject to the annual allowance charge of forty percent.

The annual allowance is purposely a high amount so that a relatively small percentage of savers should be affected by the charge. The annual allowance is set to increase each year as follows:

Hereafter the annual allowance amount will be reviewed every five years. Again, the amount you are allowed to contribute to your pension savings account is not limited, but any contributions which exceed the annual allowance limit will be subject to the forty percent annual allowance charge.