The money you pay into a Registered Pension Scheme receives tax relief from the Government up to certain limits. Put simply this means some of the money that would have gone to the government as tax goes towards your pension instead.
This not only helps to boost your savings for the future, but it can also help to reduce the amount of tax you pay.
The amount of tax relief you can receive is limited and up until recently there have been two main allowances. The two main allowances are the Annual Allowance and the Lifetime Allowance.
The Chancellor introduced tax changes to these allowances in the 2023 Spring Budget.
Annual Allowance (AA)
The standard Annual Allowance (AA) has increased from £40,000 to £60,000 with effect from 6 April 2023. The AA is the amount of private pension benefits that you can build up with tax relief in a single tax year. You can have tax relief on contributions to your pension of whichever is the lower of 100% of your annual earnings or the annual allowance. (Individual pension schemes may be more restrictive).
Money Purchase Annual Allowance (MPAA)
There is an exception to the standard Annual Allowance rule.
This will only affect you if you are 55 or over, access more than the tax-free lump sum in a Defined Contribution pension pot and you continue to contribute to your current pension at the same time.
The Chancellor increased the MPAA (which applies to any subsequent Defined Contribution (DC) savings by individuals who flexibly access their DC benefits) from £4,000 back up to its previous level of £10,000.
If you exceed this allowance, you could be subject to taxation.
For more information, please go the GOV.UK website.
Lifetime Allowance (LTA)
The LTA represented the amount of pension benefits you could build up with tax relief over your working life.
This allowance has now been abolished and people will now be able to save an unlimited amount in their pension pots without incurring tax (from 6 April 2023).
For more information, please go to the GOV.UK website via https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
Please also see the Usdaw Pensions and Tax Guide via https://dtp.usdaw.co.uk/451/