Retirement Planning and the Annual Allowance

The Annual Allowance is the limit applied to tax relieved savings and/or benefits that can be made by or on behalf of an individual within a single tax year, anything in excess of this will receive a tax charge. It shouldn’t be confused with the amount of tax relief an individual can claim within that tax year, they are separate tests. The issue with the Annual Allowance and where the complexities can come about is because there are multiple different Annual Allowances depending on a client’s circumstances. The standard Annual Allowance is £40,000 but we will initially consider the variations to this.

Tapered Annual Allowance (TAA)

The TAA reduces the AA down to as low as £4,000 for those with Threshold income over £200,000 and Adjusted income of £312,000 or more. The calculations of these income figures need to be carefully considered when determining if and how contributions should be made. For example, whereas salary sacrifice contributions may make sense for lower earners, for those that are bordering the Threshold income, using salary sacrifice could mean a reduced TAA.

When determining the clients available AA, anyone impacted by the TAA or close to being impacted by it should calculate their Threshold and Adjusted income assuming the proposed contributions are made as both personal contributions and employer contributions could impact their TAA. 

Money Purchase Annual Allowance (MPAA)

The MPAA comes into force where a client had “flexibly accessed” benefits from a money purchase pension scheme. This includes flexi-access drawdown income payments, uncrystallised funds pension lumps sums, flexible annuities but excludes the pension commencement lump sum, capped drawdown payments, standard annuities, as well as payments from defined benefit pensions. The MPAA cannot utilise carry forward and any carry forward accrued will immediately be lost at the point of a trigger for use against money purchase contributions, it is still available for defined benefit accrual . This means that if a client intends to you carry forward in the year but may also trigger the MPAA then it is imperative that this all occurs in the correct order to avoid an annual allowance charge.

Alternative Annual Allowance

The Alternative AA only comes into play where the MPAA is in force. It allows the use of the remainder of the AA for defined benefit accrual. Unlike the MPAA carry forward is still available when testing defined benefit accrual. This does give some flexibility to those that want to remain an active member of their defined benefit scheme but need access to their money purchase benefits.

Carry forward

Carry forward allows clients to utilise unused annual allowances from the previous three tax years, although they must have earnings to support personal contributions, more detail on this below. You must first use the current tax year fully and then use the oldest tax year next and so on. The important thing to be sure of is that the client has enough, not necessarily to get too hung up on which year it is used from at this point in time.

If total contributions do not exceed the annual allowance including carry forward then there is no need to declare this on a tax return, only contributions in excess of this need to be declared in the pension tax charge section of self-assessment.

The Charge

Exceeding the annual allowance will mean tax charges, designed to recoup tax relief given. Any contributions in excess of the clients available AA, including carry forward will effectively be taxed at their marginal rates of tax by adding the excess to their income for the year to determine tax rates applicable. Even where contributions are entirely paid by the employer the charge is payable by the client. All AA charges need to be declared via self-assessment in the usual way, but there is no need to declare or provide carry forward calculations to HMRC although it is good practice to retain this information.

For those contributing to a relief at source pension scheme, who are higher or additional rate taxpayers they will need to ensure they claim any extra tax relief due. This should be done even if they exceed the annual allowance so as not to be unfairly penalised.

Tax relief

The Annual Allowance shouldn’t be confused with the amount of tax relief an individual can claim within that tax year, they are separate tests. Tax relief granted for personal contributions are limited by relevant UK earnings or £3600 if less. This could mean that the client has sufficient carry forward to make a contribution but because it is a personal contribution that no tax relief should be granted.

In addition, earnings do not limit the Annual Allowance, this is particularly important when considering Carry Forward. For instance, for a client with earnings of £20,000 they can only personally pay pension contributions of £20,000 gross but they would still have an Annual Allowance of £40,000 leaving £20,000 in this example to carry forward to a later year if required.


Planning around the different versions of the AA and ensuring that carry forward is utilised appropriately can be quite difficult in some circumstances. The most important thing to consider is if the client had sufficient AA and earnings to make the proposed contributions. 

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