The annual allowance is the maximum amount you can contribute to your Self-Invested Personal Pension (SIPP) and other pension schemes each tax year while still benefiting from tax relief. For the 2023/24 tax year, the maximum annual allowance is set at £60,000.
This limit applies to the total contributions made by you, your employer, or any third party into all of your pension schemes.
How Does the Annual Allowance Work?
Contributions: The annual allowance includes all contributions made into your SIPP and any other pensions you have. It covers both your own contributions and any made by your employer.
Tax Relief: You receive tax relief on contributions up to the annual allowance, provided they don’t exceed 100% of your UK earnings. For example, if you earn £50,000, your maximum tax-relieved contribution would be £50,000 for that year.
Exceeding the Allowance: If your total contributions exceed the £60,000 limit, you won’t receive tax relief on the excess, and it may be subject to an annual allowance charge.
Can I Carry Forward Unused Allowances?
Yes, if you haven’t used your full annual allowance in the last three tax years, you can carry forward the unused amounts. This allows you to make larger contributions in the current year without exceeding your tax-relieved limit. To use carry forward:
You must first fully use your current year’s annual allowance.
You must have been a member of a UK-registered pension scheme in the years from which you are carrying forward.
You can only contribute up to 100% of your earnings for the current tax year, regardless of how much you’re carrying forward.
Special Rules for High Earners: Tapered Annual Allowance
For high earners, the annual allowance may be reduced under the tapered annual allowance rules. If your adjusted income (which includes your salary, bonuses, and pension contributions) exceeds £260,000 (as of 2023/24), your annual allowance is reduced. The taper reduces your allowance by £1 for every £2 of income over £260,000, down to a minimum of £10,000.
Money Purchase Annual Allowance (MPAA)
If you start taking money from your SIPP or any other pension using flexible access options, such as income drawdown, the Money Purchase Annual Allowance (MPAA) might apply. In such cases, your annual allowance for defined contribution pensions is reduced to £10,000 (2023/24).
This lower limit is designed to prevent people from "recycling" pension withdrawals back into new contributions to benefit from tax relief.