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The general rule is:
For pension contributions, there is an Annual Allowance (of £40,000 for 2019/20) which is the maximum one can pay into a pension scheme in a tax year. If you (or your employer) don't use all of the Annual Allowance, then you can carry forward unused Annual Allowance for up to three tax years – and so make pension contributions in excess of those years’ Annual Allowance.
Reduction when taxable income is high
If you have high levels of income - in excess of both taxable income of £110,000 and of Adjusted Income (taxable income plus Employer pension contributions) of £150,000 - then the Annual Allowance is reduced by £1 for every £2 that your Adjusted Income exceeds £150,000 - until it is reduced to £10,000 - so, the more you earn, then the less you can pay into your pension!
What happens if you accidentally overfund your pension in a tax year?
There are two ways you could do this in a year:
If one pays pension contributions in excess of the higher of £3,600 and one’s Net Relevant Earnings (annual salary plus benefits-in-kind, plus any self-employment income), then no tax relief is given on the excessive pension contributions – and HMRC may allow a ‘refund of excess contributions lump sum’ to be paid back by the pension company.
If one makes more contributions than the Annual Allowance allows, there is an ‘annual allowance charge’ on the excess contributions - calculated at the taxpayer's marginal rate of tax (although the pension contributions still do get tax relief).
So, it can be worth keeping a record of contributions made in each tax year, and available Annual Allowances to carry forward.
By Peter Bromiley
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