Restrictions on Pension Contributions

Pension contributions can reduce your tax liability, but restrictions on contributions exist, especially for high-income earners.

Receiving tax relief on pension contributions

The government rewards people for contributing to their pension – and their future finances – by granting tax relief on pension contributions. Some tax you would normally owe HMRC will be redirected to your pension.

You’ll receive 20%, 40% or 45% tax relief depending on your taxpayer status. For example, adding £100 to your pension will only cost a basic rate taxpayer (20%) £80 and the government will top up the remaining £20 (the rules are different in Scotland).

The amount contributed to your pension can benefit from tax relief, providing it doesn’t exceed an annual allowance. If you stay within the annual allowance within a tax year, you can receive tax relief on 100% of earnings or £3,600, whichever is greater.

What is the annual allowance?

The pension annual allowance is an amount of money you can contribute to your defined contributions pension – and the amount of benefits you can build within the scheme for tax relief. The current annual allowance is set at £40,000* and includes both you and your employer’s contributions across all of your pensions except your State Pension.

There is a reduced annual allowance for high-income earners. We explain this further below.

What happens if I exceed the allowance?

If you exceed the £40,000* annual allowance, you will be subject to a tax charge called an annual allowance charge. There are strategies to mitigate this charge using unused portions of annual allowance from previous tax years.

The Tapered Annual Allowance (TAA)

The Tapered Annual Allowance (TAA) is a reduced annual allowance for high-income individuals. These individuals’ allowance will be reduced by £1 for every £2 that their adjusted income exceeds £240,000. However, the TAA cannot be reduced by more than £36,000, so the lowest annual allowance is capped at £4,000.

*Tax year 2022/2023