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This is the second part of two articles on Pension Tax, you may wish to read Tax on Pensions Part 1 first.
You usually pay tax if savings in your pension pots go above the annual allowance. This is currently set at £40,000 a year. You can carry over any allowance you did not use from the previous 3 tax years. You need to carry over unused allowance from the earliest tax year first.
The tax year 6 April 2015 to 5 April 2016 was split into 2 periods with different tax-free allowances.
6 April 2015 to 8 July 2015 (the ‘pre-alignment tax year’)
9 July 2015 to 5 April 2016 (the ‘post-alignment tax year’)
You can carry over up to £40,000 of unused allowance from the pre-alignment tax year to use in the post-alignment tax year. You can carry over any remaining unused annual allowance to later tax years. The allowance was £40,000 for the 2016 to 2017 and 2017 to 2018 tax years.
Sometimes it’s possible to keep paying in after you take money out of a pension pot - but you may have to pay tax on contributions over £4,000 a year.
That’s because your annual allowance drops to £4,000 for all defined contribution schemes you’re in. It drops in the first full tax year after you take money from your pension pot.
The lower allowance is called the ‘money purchase annual allowance’. You cannot top it up with unused allowance from previous years.
(6 April to 8 July 2015), this money purchase annual allowance is £20,000.
(9 July 2015 to 5 April 2016) does not have its own money purchase annual allowance, but you can bring over up to £10,000 of the allowance from the pre-alignment year.
Your annual allowance drops when you take any of the following from a defined contribution scheme:
The annual allowance also drops to £4,000 in some other situations:
Your annual allowance also drops to £36,000 for all defined benefit pension pots you’re in. You can usually top this up with unused allowance from the previous 3 tax years.
If you go over the pre-alignment tax year’s £20,000 allowance, that year’s annual allowance for defined benefit pensions changes to £60,000. You can carry over up to £30,000 of this, but the rules are complicated. It’s advisable to speak to a tax or pensions professional to check.
From April 2016 you’ll have a reduced (‘tapered’) annual allowance if both the following apply:
You usually pay tax if your pension pots are worth more than the lifetime allowance. This is currently set at £1.03 million.
You might be able to protect your pension pot from reductions to the lifetime allowance.
In order to check how much lifetime allowance you’ve used you need to ask your pension provider how much of your lifetime allowance you’ve used.
If you have more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.
What counts towards your allowance depends on the type of pension pot you get.
Type of pension pot
What counts towards your lifetime allowance
Defined Contribution - personal, stakeholder and most workplace schemes
Money in pension pots that goes towards paying you, however you decide to take the money
Defined benefit - some workplace schemes
Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider
You may have to provide information about other pension schemes you’re in to check if you’re above your lifetime allowance if you:
If you go above your lifetime allowance your pension provider will deduct the tax before you start getting your pension.
You’ll need to report the tax deducted by filling in a SATR.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:
You cannot withdraw cash from a defined contribution pension pot if you have:
It’s possible to lose enhanced protection or any type of fixed protection if:
You need to check with your employer whether they’re likely to enrol you in a workplace pension. To make sure you do not lose protection, you can either: