How Much Can I Pay into My Pension

How Much Can I Pay into My Pension?

Paying into a pension is one of the most effective ways to save for retirement. Not only does your money grow over time, but you also receive valuable tax relief on your contributions. However, there are limits to how much you can pay into your pension each year without facing a tax charge.

This article explains how much you can pay into your pension in the UK, what limits apply, and how to make the most of your pension allowances.

How much can I pay into my pension each year?

You can pay as much as you like into your pension, but there is a limit on how much will receive tax relief. This limit is known as the annual allowance.

For the 2024 to 2025 tax year, the standard annual allowance is:

• £60,000 or

• 100 percent of your UK relevant earnings (whichever is lower)

If you earn £30,000 per year, for example, you can pay up to £30,000 into your pension and receive tax relief on the full amount.

What is included in the annual allowance?

The annual allowance includes:

• Your contributions

• Your employer’s contributions

• Tax relief added by the government

It applies across all your pensions combined, including workplace pensions and personal pensions such as SIPPs. If you go over the annual allowance, you may have to pay a tax charge on the excess amount.

Can I carry forward unused allowance?

Yes. If you have not used your full annual allowance in the last three tax years, you can carry forward the unused amount. This allows you to contribute more than £60,000 in a single year and still receive tax relief, provided you were a member of a registered pension scheme during those years.

You must use up your current year’s allowance first before carrying forward unused allowances.

What is the Money Purchase Annual Allowance (MPAA)?

If you have started taking income from a defined contribution pension (such as through drawdown), your annual allowance may reduce to £10,000. This is called the Money Purchase Annual Allowance (MPAA).

It is triggered when you:

• Take a taxable lump sum from your pension

• Start receiving regular income through drawdown

The MPAA only affects contributions to defined contribution pensions. If triggered, it limits how much you can pay into your pension each year with tax relief.

What about the lifetime allowance?

As of April 2024, the lifetime allowance has been abolished. This means there is no longer a cap on the total amount you can build up in pensions during your lifetime before facing additional tax charges.

However, there are still limits on how much of your pension you can take as a tax-free lump sum. This is currently capped at £268,275 unless you hold protected rights.

Do I get tax relief on all my contributions?

Yes, provided you stay within the annual allowance. Tax relief is given at:

• 20 percent for basic rate taxpayers

• 40 percent for higher rate taxpayers

• 45 percent for additional rate taxpayers

Most workplace pensions operate under relief at source or net pay arrangements, which automatically apply the correct level of tax relief.

For personal pensions, basic rate relief is added automatically, and higher or additional rate relief can be claimed through your Self Assessment tax return.

What if I exceed the pension limits?

If you go over your annual allowance or MPAA:

• You will not receive tax relief on the excess

• You may need to declare the excess on your tax return

• You may have to pay an annual allowance charge

In some cases, your pension scheme can pay the charge on your behalf using a process called Scheme Pays, although this reduces your pension pot.

How much should I contribute?

How much you should pay into your pension depends on:

• Your age

• Your retirement goals

• How much your employer contributes

• Other savings and income you expect in retirement

A common rule of thumb is to save a percentage of your salary that is equal to half your age when you start contributing. For example, if you start saving at 30, aim to save at least 15 percent of your salary each year including employer contributions.

Final thoughts

You can pay as much as you want into your pension, but only contributions up to the annual allowance of £60,000 or 100 percent of your earnings will receive tax relief. If you have unused allowances from the previous three years, you may be able to contribute even more.

Understanding the pension limits helps you make the most of your savings while avoiding tax penalties. If in doubt, speak to a financial adviser or use a pension calculator to plan your contributions with confidence.