There is still some confusion about what level of contributions may be made to a pension so this may act as a good refresher for those thinking of making additional contributions before the end of the tax year or for those who feel they may be affected by the limits.
Firstly, personal annual contributions are limited to the higher of £3,600 or 100% of UK earnings. Tax relief is given at source so someone earning £15,000 could make a net contribution of £12,000 with £3,000 tax relief added. The earnings limit is separate from the Annual Allowance (AA) which is currently £40,000. If you haven’t utilised the AA in the previous three tax years ie. going back to the start of 14/15 for the 17/18 tax year, you may carry forward unused pension relief to the present tax year. However, if this is not used any remaining relief for the earliest year will be lost at the start of a new tax year ie. any unused relief for 14/15 will be foregone from 6th April 2018. Unused relief does permit therefore the making of substantial personal contributions if earnings allow. it is worth noting that there is no such earnings limit that applies to employer contributions which opens tax planning opportunities in particular to company owners and directors.
A major caveat with the AA is that individuals who have accessed flexible pension benefits are subject to a money purchase annual allowance (MPAA) that limits the future contributions they can make. The MPAA was introduced on 6th April 2015 and was originally £10,000 p.a. however this was reduced to a to a measly £4,000 with effect from 6th April 2017 by the Finance (No2) Act 2017. HMRC introduced the MPAA to ensure that there are no potential recycling issues with individuals claiming further tax relief on any new contributions made having just taken their benefits under the new pensions flexibility rules. Typical scenarios of pension benefits being taken flexibly would be taking income (but not tax free cash) from pension drawdown or making a part taxable withdrawal from a personal pension fund. For clarity, the £4,000 limit applies to contributions made to money purchase pensions and does not impact on accrual of benefits within a final salary pension scheme.
Although, therefore, the AA and carry forward of pension relief offers wide scope for most, there is the pitfall of the MPAA for others so great care needs to be taken as the tax charges for exceeding the allowance are penal.