The government encourages you to save for your retirement by giving you tax relief on the contributions that you pay into a pension scheme. You receive tax relief on your contributions at the time they are deducted from your pay. Your tax is calculated on your pay less your pension contributions.
HM Revenue and Customs (HMRC) rules govern:
- the lump sum amounts you can take tax-free from pensions, and
- the total amount of contributions you can make into all pension arrangements and receive tax relief.
There is no overall limit on the amount of contributions you can pay to all schemes. However, tax relief is only given on contributions up to the sum of 100% of your taxable earnings in a tax year (or £3,600 if greater).
Most individuals will not meet the limits as their pension savings will be less than the allowances.
Lump sum and annual allowances
Generally, there are 2 main allowances for pension savings:
- Lump sum tax free allowances These are limits on the amount of tax-free cash you can take from your pensions.
- Annual Allowance This is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge.
The allowances cover any pension benefits you may have in all tax registered pension arrangements, not just this scheme.
For further information, visit the HMRC website
Lifetime Allowance (LTA) protections
The LTA is abolished from April 2024. Previously the government introduced protections for those that may be affected by the LTA: