The annual allowance is the maximum amount by which the value of an individual's pension savings across all the registered pension schemes of which they are a member may increase in any year without tax penalties arising. The annual allowance charge is levied where the annual allowance is exceeded. The amount of the annual allowance has changed over time and is set by order from the Treasury. It is also possible to carry forward unused annual allowance from the previous three tax years.
Unlike other types of allowances, considerations relating to the annual allowance are relevant at the point funds are paid into the registered pension scheme.
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. An annual allowance charge may, in certain circumstances, be paid by the scheme through a system known as Scheme Pays.
For further information, see Practice Notes: The annual allowance and Using Scheme Pays to pay the annual allowance charge.
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