The annual allowance
Produced in partnership with Wyn Derbyshire of gunnercooke LLP
The annual allowance

The following Pensions guidance note Produced in partnership with Wyn Derbyshire of gunnercooke LLP provides comprehensive and up to date legal information covering:

  • The annual allowance
  • Annual allowance—basic principles
  • How much is the annual allowance?
  • Money purchase annual allowance (MPAA)
  • The three-year carry forward rule
  • The annual allowance test
  • The pension input period
  • The pension input amount
  • The annual allowance charge
  • Scheme Pays
  • more

The basic principle underpinning the pensions tax regime is that members of registered pension schemes enjoy:

  1. various tax advantages while accruing retirement and life assurance benefits, and

  2. certain tax advantages when particular benefits are paid from a pension scheme (eg the tax-free pension commencement lump sum)

In exchange, and if tax charges are to be avoided, a registered pension scheme must comply with various restrictions as regards the:

  1. accrual of benefits

  2. payment of contributions, and

  3. payment of benefits

For further information, see Practice Note: Tax treatment of pensions—an introduction.

One of the key restrictions imposed on the accrual of members’ benefits under the pensions tax regime is the annual allowance.

Annual allowance—basic principles

The annual allowance is the maximum aggregate amount of pensions savings that can be made in any year by or on behalf of an individual under all registered pension schemes the individual is member of without incurring tax penalties.

If the annual amount saved under the registered pension schemes by or on behalf of an individual exceeds the annual allowance, a tax charge known as the ‘annual allowance charge’ will arise. For further information on that charge, see The annual allowance charge, below.

As well as applying to members of registered pension schemes, the annual allowance rules can also apply in certain circumstances to members of overseas pension schemes where the member