Pension contributions receive tax relief and for higher rate taxpayers the relief obtained can up to 45%. The annual allowance is normally £40,000 but if you have started making use of the fexible benefits from your pension the limit drops to £4,000. There is a taper on the relief applied to earners with income over £150,000 and £1 of  the pension allowance is lost for every £2 earned above this limit until the allowance is capped at £10,000. There is also a lifetime allowance for most people of £1.055m.

The value of the pensions allowance depends on the type of pension scheme. In a money purchase scheme it is the amount of contributions put in either by you or your employer. In a defined benefit scheme it is the increase in value of your pension from the start of the pension input period to the end of the pension input period. Your pension scheme administrator should be able to tell you if your pension savings are over the annual allowance.

Pension savings above the total allowance will be liable for a tax charge. The tax charge depends on the level of your other taxable income.The amount that is in excess of your pension allowance is added to your income and taxed accordingly once personal allowances and income bands are taken into account.

The rules around the pension allowance can be quite complex depending on your circumstances and the type of pension you have so if you think your pension savings will be close to the pension allowance limit, then consider seeking more advice from your pension administrator, HMRC or your accountant.

Stakeholder pensions can be started for children, or non taxpayers (for example a non working spouse) and you can make contributions on their behalf which also obtains tax relief. The maximum annual contribution including tax relief is £3,600 per child or non taxpayer.

Contributions to a pension scheme