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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

A reader wants to make a large contribution to their retirement savings and needs to understand the rules
Thursday 09 Dec 2021 Author: Tom Selby

I recently sold my company shares and understand I can pay a larger pension contribution from the proceeds using the last three years’ annual allowances.

How does this work in practice?


Tom Selby, AJ Bell Head of Retirement Policy says:

The amount you can save tax-efficiently in a pension each year is capped at 100% of your earnings. So, for example, someone earning £30,000 could save up to £30,000 a year in a pension and receive tax relief on that amount.

The maximum anyone can save in a pension each year without using ‘carry forward’ is £40,000. This includes any employer contributions plus tax relief. If you have no UK earnings you can still save up to £3,600 a year (including tax relief) in a pension.

If you have accessed taxable income flexibly from your retirement pot, you will trigger the ‘money purchase annual allowance’ or MPAA. This will reduce your maximum annual allowance from £40,000 a year to just £4,000.

Flexibly accessing your pension includes taking an income through drawdown or taking an ad-hoc lump sum – although if you just take you tax-free cash you won’t trigger the MPAA.

If you are a very high earner you might be affected by the annual allowance taper, reducing your annual allowance by £1 for every £2 of adjusted income you earn above £240,000, to a minimum of £4,000 for those with adjusted income above £312,000.

It is possible to carry forward up to three years’ unused annual allowances into the current tax year. In order to use carry forward you must have used all your annual allowance in the current tax year and been a member of a pension scheme in the years you wish to carry forward (although you needn’t have made any contributions in those years).

The amount you can carry forward is also controlled by your UK earnings in the current tax year. So, for example, someone with £60,000 of earnings who had already contributed £40,000 into their pension in the current tax year could carry forward a maximum of £20,000 of unused annual allowance from previous tax years.

If you have triggered the MPAA you are barred from using carry forward at all.

If you were affected by the annual allowance taper in any of the three years from which you want to carry forward allowances, you will only be able to carry forward up to the tapered amount.

For example, if in the previous tax year you didn’t pay into a pension and the taper reduced your available annual allowance to £10,000, this is the maximum you would be able to carry forward from that year to the current tax year.

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