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Contribution limits

Whilst theoretically there are no limits on how much can be paid to a registered pension scheme, there are limits which restrict the tax breaks available.

The maximum that can be paid will normally be influenced by the answers to the following questions:

1. Does the individual have sufficient earnings to benefit from tax relief?
2. Will it be covered by their annual allowance (including anything carried forward) - or the money purchase annual allowance where it applies?

Generally, the maximum amount which can be paid will be the lower of the amount that's tax relievable and the total of unused allowances. Most providers will not accept contributions which are not relievable.

Tax relief

Tax relief is available to ‘relevant UK individuals’ under age 75 on pension contributions up to the higher of:

• £3,600
• 100% of their ‘relevant UK earnings’ for that tax year

If any third party payments are made, they count towards this limit too. But employer contributions don’t.

Although the regime allows contributions that don't attract tax relief to be made, pension providers don't have to accept them - and many don’t, refunding any that are subsequently found to be excessive. It's also worth noting that, even where personal contributions don't attract tax relief, they still count towards the individual's annual allowance.

The way in which the tax relief is given depends on the type of pension scheme and the level of relief available depends on the amount and type of income the individual receives. Some individuals may need to reclaim some of the tax relief.

Relevant UK earnings

Relevant UK earnings for a tax year include:

• a self-employed individual’s profits from the trading year ending in the tax year. For partners, their share of profits
• employment income (including salary, bonuses, overtime and commissions)
• benefits in kind
• the taxable part of redundancy payments - the first £30,000 is tax free
• taxable payments in lieu of notice

They don't include:

• dividends
• savings income
• rental income
• pensions in payment
• State benefits

Please note that these lists are not exhaustive.

Further detail can be found in the Pensions Tax Manual - see the section ‘Earnings that attract tax relief’.

Some individuals will find it difficult to accurately predict their earnings - particularly if making contributions early in a tax year. So it may be necessary to initially err on the side of caution, then top up once an accurate figure is known.

There's no requirement to produce evidence of earnings when payments are made.

Of course, sometimes people get it wrong and make contributions above the relievable amount. When this comes to light, the contributions above the relievable amount will normally be refunded, with the excessive tax relief passed back to HMRC by the scheme administrator or dealt with via self-assessment.

Method of tax relief

Tax relief on an individual's pension contributions can be given in one of three ways. This is determined by the type of scheme you’re in.

How the methods differ

For both the net pay and individual claim methods, relief is given by allowing the gross contribution as a deduction against gross earnings - so there’s a lower amount subject to tax. But, currently*, this does mean that tax relief is only given to the extent that income tax is paid.

However, for the relief at source method, contributions are always paid net of the basic rate relief, which the pension provider claims and adds to the fund. Higher or additional rate tax relief on contributions is given by increasing the basic rate band (and higher rate band, if applicable) by the amount of the gross contribution.

So the relief at source method is advantageous for non-earners, or for individuals making contributions based on earnings within the personal allowance. This is because basic rate relief is given even where no tax is actually being paid.

* The government consulted on this issue and has come up with a solution. From the 2024/25 tax year, HMRC will identify affected members in net pay arrangement schemes and notify them that they’re eligible to receive a top-up to bring them into line with the relief that members of relief at source schemes would receive. The first payments will therefore be made in 2025/26. Members will have to provide their details to HMRC in order to receive the payments.

Salary sacrifice
 
Another possible way for employed individuals to fund their pension is through a salary sacrifice agreement with their employer. This involves an agreement with the employer to exchange some salary or bonus for an employer pension contribution. This can produce National Insurance savings for both the employer and employee.

Further information is available in our guide ‘Salary sacrifice and pensions’.

Relevant UK individuals

A relevant UK individual is someone who, in relation to a tax year:

• has relevant UK earnings or
• is resident in the UK at some time during the year or
• was resident in the UK both at some time during the previous five tax years and when they joined the pension scheme or
• has (or their spouse has) general earnings from overseas Crown employment subject to UK tax for the year

Annual allowance

The annual allowance is the total amount that can normally be paid in total by an individual, their employer or a third party on their behalf, to pensions in a tax year without facing a tax charge. The standard annual allowance is £60,000. But some high earners and people who have started taking benefits may have a lower allowance.

If the annual allowance hasn’t been used up in any of the previous three tax years, it may be possible to ‘carry forward’ the unused allowance. This can allow more to be paid in the current tax year.

But remember, the amount an individual can pay personally and receive tax relief on may be further limited by their relevant UK earnings.

For defined benefit scheme members, it’s the increase in the value of their benefits that’s tested, not the actual amount paid.

The rate of the annual allowance tax charge is determined by the rate of income tax an individual would pay if the 'excess amount' was included in their taxable income for the tax year.

Further details are available in our ‘Annual allowance’ guide.

Reduced annual allowance for high earners (tapering)

If an individual’s ‘adjusted income’ (total income plus the value of any employer payments) is more than:

• £260,000 for tax years 2023/24 onwards
• £240,000 for tax years 2020/21 to 2022/23 
• £150,000 for tax years 2016/17 to 2019/20

their annual allowance will be reduced by £1 for every £2 of adjusted income over that level.

Tapering stops once the annual allowance is reduced to £10,000. The £10,000 allowance will apply to those with an adjusted income of £360,000 or more.

For the tax years 2020/21 to 2022/23, tapering stopped once the annual allowance is reduced to £4,000. The £4,000 allowance applied if adjusted income was £312,000 or more.

This reduced allowance is known as the tapered annual allowance.

Total income includes salary and any other taxable income received in the tax year, such as:

• pension income
• dividends
• savings interest
• bonuses or sales commission
• rental income

However, the full £60,000 (£40,000 for tax years 2016/17 to 2022/23) annual allowance is retained if ‘threshold income’ is:

• £200,000 or less for tax years from 2020/21
• £110,000 of less for the tax years 2016/17 to 2019/20

Threshold income is total income less any payments made personally by an individual into their pension in the tax year. Employer payments don’t count towards threshold income unless they’re in respect of a new salary sacrifice arrangement made after 8 July 2015.

Further information is available in our 'Tapered annual allowance' guide.

Reduced allowance for some individuals taking benefits (MPAA)

If an individual has taken more than just their tax-free cash from their pension, they may* have a reduced annual allowance of £10,000 - this is known as the money purchase annual allowance (MPAA). If the MPAA applies, it also means that they can’t ‘carry forward’ unused allowances from earlier years.

These restrictions do not apply to the funding of defined benefit schemes.

* There are some exceptions that don’t trigger the MPAA - for example, buying a guaranteed income for life (an annuity) or receiving a defined benefit pension.

Further information on the MPAA is available in our ‘Annual allowance’ guide.

Lump sum allowance & lump sum and death benefit allowance

From 6 April 2006 to 5 April 2023, the lifetime allowance (LTA) was a limit on the amount of pension benefits that could be crystallised without incurring a tax charge. For the 2023/24 tax year LTA tax charges were removed, and the LTA was abolished from 6 April 2024.

While the LTA no longer acts as a limit to what can be saved tax efficiently, it has been replaced by two new allowances to cap the tax-free lump sums that can be paid either as tax-free cash or as lump sum death benefits.

Lump sum allowance (LSA)

It will still be possible to take 25% of the pension fund tax-free as a pension commencement lump sum (PCLS). However, the member must have sufficient LSA for it to be tax-free.

The LSA has been set at £268,275 for those without transitional protection.

Any benefits which are taken after the client has used up their LSA will be fully taxable as income. This means pension saving will be tax neutral if the rate of tax relief received mirrors the rate of tax when benefits are taken. But of course, those pension savings will still enjoy investment returns within the pension which are free of income tax and CGT and the pension will generally be outside the estate for IHT purposes.

Lump sum and death benefit allowance (LSDBA)

The LSDBA limits how much overall can be paid as a tax-free lump sum, both during the member’s lifetime and on death. Consequently, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member had taken during their lifetime.

The LSDBA has been set at £1,073,100 for those without transitional protection.

Refunding contributions

In most circumstances, once contributions have been paid to a pension scheme they can't be refunded. But there are certain occasions where they can - the most common are:

• if, after joining a pension scheme, an individual cancels their membership within the 'cooling off period', their contributions can be refunded
• if an individual's contributions (including any third party contributions) in a tax year are more than 100% of their relevant earnings (or £3,600 if greater), the excess may be repaid to them. The refund must be made within six years of the end of the tax year in which the excess contribution was paid. But pension providers and pension scheme trustees are not obliged to refund such contributions. In practice, many pension providers only accept tax relieved contributions and will automatically refund any excessive contributions. The excessive tax relief claimed by the provider on the individual's behalf is returned to HMRC
• if an individual has been a member of their employer's occupational pension scheme for less than two years for DB schemes or 30 days for money purchase schemes, they may be entitled to a ‘short service lump sum’ representing a refund of their own contributions
• if an individual's contributions have been collected due to an administrative error, a refund can be made. This could happen, for example, if an individual asked for their contributions to be reduced but the higher amount continued to be collected by mistake

Individuals moving overseas

Whether contributions can continue when an individual moves overseas can depend on:

• the type of pension scheme,
• whether the individual still has relevant UK earnings, and
• whether the individual is going overseas permanently or on secondment

Personal pension schemes (including GPPs, SIPPs and stakeholder schemes)

If the individual still has relevant UK earnings, their personal contributions can continue in the same way as when they were UK resident. If they don’t have relevant UK earnings, they can contribute up to £3,600 a year to a ‘relief at source’ scheme for a further five tax years after the one in which they left the UK - provided the scheme was established when they were UK resident. So if someone left the UK near the start of a tax year, they could continue making tax relievable contributions for almost six years.

Occupational pension schemes

Employee contributions to occupational pension schemes (either paid as personal contributions or by salary sacrifice) can continue only if the employee is on secondment. But if they no longer have relevant UK earnings, they should seek expert tax advice.

Restoring child benefit or personal allowance with a pension contribution

Eligibility to certain allowances and benefits is based on adjusted net income. This is effectively total income from all sources less any pension contribution made by the individual.

Individuals with adjusted net income over £50,000 start to lose any child benefit they're eligible for at the rate of 1% of the benefit for every £100 over this threshold. The benefit is completely lost once their income is £60,000 or more.

Similarly, individuals start to lose their personal allowance if their adjusted net income goes over £100,000. It's reduced by £1 for every £2 of taxable income over £100,000. So, in 2024/25, they lose the £12,570 personal allowance completely when their adjusted net income reaches £125,140.

But in both these situations, making a pension contribution can help to restore some or all of the personal allowance and/or child benefit as the contribution is a deduction from adjusted net income.

In the situation where a pension contribution reduces adjusted net income between £125,140 and £100,000, the effective rate of tax relief is 60% (for those living in England, Wales and Northern Ireland - different tax rates and bands apply in Scotland).

The effective rate is even higher if the contribution is made via a salary or bonus exchange arrangement. The effective rate of tax relief for a contribution that restores child benefit depends on the number of eligible children.

In-specie contributions

Pension contributions to registered pension schemes must generally be in cash. The exception - where a contribution can be made by transferring legal ownership of an asset to a pension scheme, known as an in-specie contribution - is the transfer of ownership of ‘eligible shares’.

'Eligible shares' are shares acquired through a savings related share option scheme (commonly known as SAYE, or sharesave, plans) or share incentive plan (SIP), where ownership is transferred to the pension scheme within 90 days of the individual becoming entitled to them.

• SAYE shares - the 90 day period starts when the individual exercises their right to acquire the shares
• SIP shares - the 90 day period starts when the individual instructs the SIP trustees to transfer the shares to them

Following an Upper Tribunal case in May 2020, it’s no longer possible to make in-specie contributions of anything other than shares from approved share option schemes.