Pension Tax Allowances

The amount of tax-free pension savings you can build up over a tax year is restricted by the Annual Allowance. The Annual Allowance is set by the government and for the tax year 2023/24 it is £60,000 (although it may be lower for higher earners – please see below). Pension savings you make in excess of the Annual Allowance are subject to an Annual Allowance charge at your highest rate of income tax.

Any unused Annual Allowance from the previous three tax years may be carried forward into the current tax year to help offset any Annual Allowance charge arising in the current tax year or to help boost your pension savings in that year.

The Annual Allowance for the 2023/24 tax year is £60,000, however it will be lower if the amount of your total taxable income plus the amount of your pension savings is greater than £260,000. In these circumstances your Annual Allowance would be reduced by £1 for every £2 of income above £260,000 down to a minimum Annual Allowance of £10,000 for those with income of £360,000 or more.

Adjusted annual income is defined as all taxable earnings (includes taxable earnings from employment, including bonus, the taxable value of any Share Matching Scheme, LTIP, the value of any benefits in kind (for example company car and private medical insurance) and any taxable earnings outside of employment (for example, dividend income and income from buy-to-let properties) and all pension savings during the year but does not include charitable contributions. 

The Money Purchase Annual Allowance (MPAA)

The Money Purchase Annual Allowance (MPAA) is a special restriction on the amount you can pay in to your DC pension pot and still receive tax relief once you start to access your DC pension savings.  It was created to stop people from trying to avoid tax on current earnings or gain tax relief twice, by withdrawing pension savings and then paying them straight back into a pension scheme again.  The MPAA only applies to contributions that you make to DC pension schemes.  It does not affect Defined Benefit (DB) pension schemes.

The MPAA is £10,000 from 6 April 2023. The MPAA kicks in when you start to access your pension pot for the first time, for example, when:

• You take your whole pension pot in the form of a lump sum
• You take a series of taxable lump sums (UFPLS) from your pension pot
• You use your pension to set up a drawdown scheme and start to take income from it
• You have a capped drawdown plan (a type of scheme from before April 2015) and exceed the cap on your income
• You buy a flexible or investment linked annuity that could see your income go down

There are plenty of pension arrangements that won’t trigger the MPAA, for example:

• You take a tax-free lump sum and buy an annuity that gives you a guaranteed minimum income
• You take a tax-free lump sum from your pension pot and set up a drawdown scheme but don’t yet take any income from the drawdown scheme
• You cash in pension pots with a value of less than £10,000.

This was the total limit on the pension savings which qualified for tax relief and applied to all of the pension benefits you built up over your working life within a registered pension scheme. It was introduced by the Government on 6 April 2006 and was abolished with effect from 5 April 2024. At the time it was abolished the amount of the LTA was £1,073,100. Pension benefits in excess of the Lifetime Allowance (LTA) were subject to a tax charge known as the LTA charge.

From 6 April 2023 individuals with a protected LTA will NOT need to comply with the conditions for maintaining protection (such as no further pension accrual or contributions in the case of fixed protections) in order to maintain entitlement to a maximum tax-free cash lump sum based on their higher protected LTA.

From 6 April 2024 two new pension tax allowances have been introduced; the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA), which place limits on the amount of tax-free cash sums that can be paid to or in respect of an individual from their pension arrangements.

This was introduced by the Government with effect from 6 April 2024. This is a fixed cumulative limit of £268,275 (25% of the Lifetime Allowance when it was abolished).  It applies to the amount of tax-free cash that can be paid to a person as a pension commencement lump sum and as the tax-free part of an uncrystallised funds pension lump sum.  If you exceed this limit, the amount over the limit will generally be taxed as income. Members with existing LTA protection may have a higher limit before they are liable to pay tax.

This was introduced by the Government with effect from 6 April 2024. This is a fixed cumulative limit of £1,073,100 (the same as the Lifetime Allowance when it was abolished).  It applies to the tax-free elements of lump sums that can be paid in life and death, to or in respect of an individual.  In addition to the pension commencement lump sums and tax-free elements of an uncrystallised funds pension lump sum, this allowance also applies to the tax-free elements of serious ill-health lump sums and lump sum death benefits. Members with existing LTA protection may have a higher tax-free limit.

It is recommended that you take independent financial or tax advice if you had LTA protection (e.g. primary, enhanced, fixed or individual protection) or if you think you may be affected by the new allowances.