What is the Annual Allowance (AA)?

• If you are paying in to a private pension plan of any sort you do not need to increase by any factors
• You simply need to add on the GROSS payments made into the plan during the relevant Pension Input Period (PIP)
• If you are paying in to an added years or additional pension purchase, these will also need to be factored in to the increase of your pension benefits.

What are the tax implications?

If your pension growth exceeds the Annual Allowance (AA) you will be taxed at your highest marginal rate of income tax on the amount over the AA limit. The extra growth is added to your taxable income and will be subject to tax as per current income tax thresholds.

So, if your pension growth is £20,000 over the AA limit and your income is £30,000, then for Income Tax purposes your ‘income ’in that year will be £50,000 and for the 2019/20 tax year the AA charge will be 20%, or £20,000 (excess) x 20%, an AA tax bill of £2,000.

You may be able to use carry forward to reduce or eliminate any growth over the threshold and therefore offset any potential charge.

What is carry forward?

If your pension growth exceeds the Annual Allowance in any one year, you can ‘go back’ up to three previous tax years to see if you have any unused allowance from these years. The maximum amount that can be carried forward is dependent upon the AA limit in the year that you are carrying forward from.

This means that if your pension growth exceeds the £40,000 threshold in any one year, you may not have any extra tax to pay, depending upon your ability to carry forward.

If you are a consistently high earner with a long service, your pension growth might be consistently high, meaning that you have very little capacity to carry forward.