Paying into a pension scheme is a tax-efficient way of saving for your future with the help of your employer who will contribute to your savings pot too. A key benefit of saving through a pension is that your contributions may also receive tax relief.
This means, if you’re a basic-rate tax-payer, for every £10 you pay it only costs you £8, as £2 is tax relief. Or if your income is taxed at the highest rate, for every £10 you pay it costs you £6.00 as £4.00 is tax relief.
As your contributions are taken from your gross pay (before any tax is deducted) by your employer it means you get the tax relief directly in your pay rather than having to go to HMRC separately.
If you do not pay income tax, you will be unable to benefit from this tax relief through your TPT Scheme.
Your TPT savings are invested. You don’t have to pay tax on the investments available through your TPT Scheme. However, if you hold savings outside of a pension scheme or ISA, you may have to pay tax on any gains you receive from your investments.
There are certain limits to these tax incentives – these are the Annual Allowance and Lifetime Allowance. If you have built up a lot of savings, or you have a high income, it’s worth making sure you understand how you might be affected. You can find out more about tax and your pension on the following sites:
The Annual Allowance (AA) is the limit on the amount of pension savings you can build up in a tax year without paying a tax charge. It applies to the total of your own and any employer contributions.
The AA limits were updated following the 2023 Spring Budget and the figures set out below apply to the 2023/24 tax year.
If your income is less than £260,000, the Annual Allowance is £60,000 for the 2023/24 tax year (6 April 2023 - 5 April 2024). That means you and your employer can pay up to a total of £60,000 into your retirement savings during the tax year without being charged tax on those payments.
If you earn over £260,000, you might be subject to the lower ‘tapered Annual Allowance’. In this case, the more you earn, the lower your Annual Allowance. If your total earnings are £360,000 or more, you will have an Annual Allowance of £10,000, which will not reduce any further.
This limit applies across all pensions you’re paying into. So, if you’re paying into more than one, you’ll need to add up all your pension contributions to determine whether you’re paying more than the Annual Allowance that applies to you.
The Money Purchase Annual Allowance (MPAA) is a reduced Annual Allowance of £10,000 that will apply to you if you:
If this applies to you, the pension provider that pays you either of the above options should provide you with a statement informing you that the MPAA applies to you. It’s then your responsibility to tell us that the MPAA should be applied.
You may be subject to a tax charge. This is based on your marginal rate of income tax, and the charge is on the amount by which you’ve exceeded the £40,000 limit or your individual lower tapered Annual Allowance by.
You may be able to carry forward any unused allowance from the previous three tax years to the current tax year.
Until 6 April 2023, this was the total amount of retirement savings you could build up in all your pensions (except your state pension) without getting a lifetime allowance (LTA) tax charge of up to 55%.
In the 2023 Spring Budget, the government made several changes to the LTA and announced its intention to abolish it altogether from 6 April 2024.
The LTA is currently set at £1,073,100 for the 2023/24 tax year and is still relevant for certain purposes. However, the impact of the LTA has changed as a result of the 2023 Spring Budget, which is explained below.
LTA charges
The key change is that LTA charges have been abolished. That means, if you access your pension benefits on or after 6 April 2023 and exceed the LTA, there won’t be any LTA tax charge. It is important to note that you will still be taxed under the normal tax rules on benefits that exceed your LTA, but the specific LTA charge (of up to 55%) will no longer apply.
Taxation of lump sums
The following lump sums which would previously have been subject to an LTA charge, will now be charged as income tax at your marginal rate, i.e. the highest tax rate you currently pay:
As to Pension Commencement Lump Sums, for those who do not have the benefit of any enhanced or fixed protections, the maximum PCLS you can take will remain at 25% of the current LTA (£268,275). The government has announced that it intends for this amount to be frozen if the LTA is abolished altogether from 6 April 2024.
Learn more about how lump sums are taxed at gov.uk.
If you haven't registered for your Retirement Savings Account yet, click here to find out how you can do it