What is the pension annual allowance?

The annual allowance is the total amount you or your employer can normally pay into your pension each tax year before having to pay tax charges. The standard pension annual allowance is currently set at £40,000.

Understanding your annual allowance

Your total income and whether you've started taking money from your pension pot can affect your allowance. When it comes to managing it, here's what you should consider:

Four ways to make the most of your pension and annual allowance

1. Benefit from tax breaks while you still can

Government tax breaks on your pension contributions at higher income tax rates may not be around forever. Consider making the most of it while you can.

When paying into your pension it’s important to remember that your pension is invested and can go down as well as up. It’s possible that you could get back less than you paid in. Read our Guide to pension tax relief.

2. Use up any allowances from previous tax years

Find out if you have any unused allowance by getting a Pension Savings Statement from your pension provider(s) (Standard Life customers should go to the payments section of their account online).

If you do, you may be able to carry it forward and you, or your employer, could pay more into your pension this year.

3. Tax relief from salary exchange

If you're an employee using salary exchange you benefit from tax relief upfront and, as your salary, you pay less National Insurance (NI). Your employer pays less NI too and some of this could be passed on as an extra pension top-up.

Salary sacrifice reduces your salary and may affect other benefits, transactions and borrowing levels that are based on your salary.

4. Rethink your savings

If you have ISAs or other savings you could consider using them to maximise your pension savings to take advantage of tax relief.

You can currently access your pension from age 55 and unlike an ISA, your pension pot is generally outside of your estate for inheritance tax purposes.

Think about doing this while you're still working because, if you have no earnings, the most you could pay in each tax year is £3,600.

  • Before making any decisions, it’s important to consider whether this approach is right for you and your circumstances. If you need to access savings before age 55, keeping them in an ISA may be a better solution.

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 The value of investments can go down as well as up. It’s possible they may be worth less than was invested. Remember, tax rules and legislation can change and the value of tax benefits depends on your individual circumstances. This information is based on our understanding in January 2019.

Access to impartial guidance

We recommend you seek appropriate guidance or advice before you make any decisions. An adviser is likely to charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose

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