AJ Bell’s Tom Selby explains the rules around pension contributions
Thursday 21 Nov 2019 Author: Tom Selby

I am retired and my income is all from pensions. How much can I contribute to my SIPP in this tax year? I have no other earned income and have not yet taken any income from my SIPP.


Tom Selby, AJ Bell Senior Analyst says:

You are only able to make tax-relieved pension contributions up to 100% of your ‘relevant’ UK earnings during any given tax year.

If, for example, you had a salary of £20,000 in 2018/19 and no other taxable income, then the most you could pay into a pension in that tax year, inclusive of tax relief, would be £20,000 (i.e. a personal contribution of £16,000 plus £4,000 tax relief).

Relevant earnings include things like salary and bonuses. They do not, however, include dividends or pension income.

If you don’t have any relevant UK earnings (which will be the case if your income is derived entirely from pensions) you can pay a maximum of £2,880 a year into a pension and receive tax relief of £720, so will end up with £3,600 added to your pension (with the tax relief added by your pension provider).

The other thing you need to consider is your age. Tax relief is only granted on pension contributions up until the age of 75, so if you’re older than this and pay money into a pension you will receive no tax relief.

The amount of tax relief you can receive when saving in a pension each year is also controlled by the annual allowance which, for most people, stands at £40,000. If you save more than this amount there is a corresponding tax charge which effectively cancels out the extra tax relief you receive.

Anyone who has accessed taxable income from their pension, usually via flexi-access drawdown or an ad-hoc lump sum, will be subject to a £4,000 annual allowance (the ‘money purchase annual allowance’).

This also kicks in for those who buy a flexible annuity (one whose payments can vary) and where someone in ‘capped’ drawdown exceeds the income limit (150% of the equivalent Government Actuaries Department, or GAD, annuity rate).

There is also a lower allowance for people on very high incomes. This annual allowance ‘taper’ affects anyone with ‘adjusted income’ above £150,000 and ‘threshold income’ above £110,000.

Broadly speaking, adjusted income is total taxable income plus any pension contributions made by your employer and threshold income is total taxable income less any personal pension contributions.

Where both these limits are exceeded, your annual allowance drops by £1 for every £2 of adjusted income above £150,000, to a minimum of £10,000 for those with adjusted income of £210,000 or more.


Send an email to editorial@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

Please note an earlier version of this article incorrectly stated that buy-to-let rental income counts as relevant earnings.

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