Annual Allowance

There are no limits on the amount that can be contributed to a registered pension scheme. However, there are limits on the tax relief that can be given. Tax relief on member contributions is limited to 100% of an individual’s earnings or £3,600 if higher, and relief for employer contributions is subject to them being made wholly and exclusively for the purpose of the business.

There is no limit on the amount that can be saved into pension arrangements each year, but there is a limit on the amount that can get tax relief. The annual allowance is the maximum amount of tax relieved pension savings that can be made each year to all pension arrangements for an individual.

In simple terms a pension input period (PIP) is a period over which pension accrual is measured to determine whether an individual has exceeded the annual allowance in a particular tax year. It works on the principle of how much was saved from the start of the pension input period to the end of the pension input period.

The amount of pension saving made during a PIP is known as the pension input amount. The type of pension arrangement determines how the pension input amount is calculated. The types of arrangement are money purchase (for example personal pensions, executive pension schemes or additional voluntary contributions), defined benefit, cash balance and hybrid.

There are different annual allowance rules for Pension Input Periods that commenced before 14 October 2010 but end in the 2011/12 tax year.

Please note: Carry forward relates to unused annual allowance not unused tax relief. If the individual relies on carry forward to make a large personal contribution they must have the earnings in the current tax year to cover it.

If total pension inputs exceed an individual’s available annual allowance, they will be subject to an annual allowance tax charge. From 2011/12 onwards the charge will be levied at an ‘appropriate rate’. The appropriate rate is determined by adding the amount subject to the charge to the member’s ‘net income’.