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How much can I pay into my pension each year?

Your annual allowance is the total amount of contributions that can be paid into pension(s) for tax relief purposes. Any contributions above your allowance will trigger an annual allowance charge.

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The total that you can pay into your pension each year is £2,880 or 100% of UK earnings if this is higher. However, there is a basic total annual allowance of £40,000 (tax year 2020-21) that you must also consider.  This will be restricted further if you have an adjusted income greater than £240,000 pa - known as the tapered allowance, or have already started taking an income from your pension pot - known as the money purchase annual allowance. 

If you exceed the annual allowance in a tax year, you won't receive tax relief on any contributions you pay that exceed the limit and you will be faced with an annual allowance charge.

Benefits will ultimately be tested against the Lifetime Allowance which stands at £1.073 million for 2020/2021.

Tapered annual allowance

Tapered annual allowance

Since 6 April 2020, people with a taxable income over £240,000 will have their annual allowance for that tax year restricted. This means that for every £2 of income they have over £240,000, their annual allowance is reduced by £1. Their reduced annual allowance is rounded down to the nearest whole pound. The maximum reduction is £36,000. So anyone with an income of £312,000 or more has an annual allowance of £4,000. People with high income caught by the restriction may have to reduce the contributions paid by them and/or their employer or an annual allowance charge will apply. However, the tapered reduction doesn't apply to anyone with 'threshold income' of no more than £200,000. For further information on the tapered annual allowance, visit our support page.

Money purchase annual allowance

Money purchase annual allowance

If you start to take money from a defined contribution pension, the amount you can pay into a pension and still get tax relief reduces. This is known as the Money Purchase Annual Allowance or MPAA.

As a basic guide, the main situations when you’ll trigger the MPAA are:

1. If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot.

2. If you put your pension pot money into a flexi-access drawdown scheme and start to take an income.

3. If you buy an investment-linked or flexible annuity where your income could go down

4. If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap

The MPAA won’t normally be triggered if:

1. You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases

2. You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it

3. You cash in small pension pots valued at less than £10,000

The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.