One of the two limits on how much you can put into your pension each tax year is the “Annual Allowance”.
This limit was £40,000, but the government increased this to £60,000 in the Spring Budget. There has been a rule that this limit is reduced if your income is too high. If your income is more than £260,000, the £60,000 annual allowance is reduced by £1 for every £2 of income over this amount, up to a maximum reduction of £50,000. This means that if your income is over £360,000, you can only contribute up to £10,000 per year to your pension.
If you go over your allowance, you will have to pay extra tax. However, if you do not use your full allowance in one year, you can use it for up to three years.
I’m a business owner; how does this affect me?
We have covered previously how pension contributions are beneficial for business owners. The increase in the maximum amount you can contribute should be helpful. The Corporation Tax rate increases from 19% to 25% on 1 April 2023, although, for many business owners, the rate will be somewhere in between. This makes pension contributions even more beneficial.
Suppose you are affected by the reduction in the annual allowance. In that case, consider leaving some of your allowance available or missing a year of contributions. You can then use your carried forward allowance in future years. However, you will need to estimate your income and contributions for each year to ensure you stay within your allowance.
Although the government has increased the maximum amount you can contribute to your pension, it’s essential to plan carefully, especially if you need to use estimated income figures. It may be impossible to provide accurate advice if your income falls into the £260,000 to £360,000 range.
I’m subject to the reduced annual allowance. Is there anything to help me?
If you accessed any taxable money from your pension plan, either through a drawdown arrangement or from cashing in your pension savings, you might have seen your annual allowance reduce. This is known as the money purchase annual allowance and reduced the amount that could be contributed to £4,000. This limit, called the “Money Purchase Annual Allowance”, will go up to £10,000. This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while costs are so high.