How much can I pay into my pension?

In order to prepare for later life, we’re often told to put aside as much as possible into our pension pots. But is it possible to overpay into our pensions? And can this have a knock-on effect when it comes to the tax we pay?

It’s important to know the rules around how much you can pay into your pension, and the tax considerations. 

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What is the pension annual allowance?

In the UK, there is no limit on the amount of money taxpayers can pay into their pension annually. However, there is a limit to how much you can contribute tax-efficiently. 

Whenever you pay into your pension, you get tax relief from the government. How this tax relief manifests will depend on your tax banding and your pension scheme. Most employers operate a salary sacrifice arrangement, which provides you with income tax and NI relief at source, regardless of your tax-banding. However, if you pay privately into a pension, the tax treatment is slightly different. Basic rate tax relief (20%) is applied to the contribution, meaning higher and additional rate taxpayers, are still owed a further 20% and 25% tax relief respectively. This relief must be reclaimed by the individual separately via a self-assessment tax return.  

The pension annual allowance is currently £60,000. This allowance is inclusive of personal contributions, employer contributions and any government tax relief you receive. Contributions which exceed the Annual Allowance (AA) will be subject to a tax charge, known as an Annual Allowance charge, which is the removal/reclaim of any tax relief applied to the excess.  

However, it is important to note that if your income is less than £60,000 per annum, you are restricted to contributing up to a maximum of 100% of your relevant UK earnings (unfortunately, rental income and dividends don’t count).

Equally, if your ‘adjusted income’ exceeds £260,000 per annum, you may be subject to the Tapered Annual Allowance (TAA), which sees your annual allowance reduced by £2 for every £1 of adjusted income above £260,000. Therefore, for adjusted income £360,000 per annum or above, your annual allowance is reduced to £10,000 per annum. 

Can you carry forward unused annual pension allowance? 

In certain circumstances, you may be able to carry forward annual pension allowances from up to three previous tax years. In this instance, you are given permission to exceed your annual allowance and still receive tax relief. 

To benefit from carry forward, you must meet the following conditions: 

• You have been a member of a UK pension scheme (not including State Pension) in each of the years you wish to carry forward from. 
• You must have fully utilised your available Annual Allowance in the current tax year first 
• Unused Annual Allowance is then drawn from the furthest year first I.e. 2021/22 is the third year back from the current tax year. 
• You cannot contribute more than 100% of your relevant UK earnings in a given tax year. I.e. if your gross earnings are £70,000, this would be the total pension contribution you can make in the current tax year, regardless of whether your available carry forward allowances are higher. 

What is the Lump Sum Allowance and Lump Sum Death Benefit Allowance? 

The Lump Sum Allowance (LSA) refers to the maximum amount of tax-free cash that can be taken across all of your pension arrangements throughout your lifetime (including lump sums from defined benefit pensions). 
Whilst the previous Lifetime Allowance (LTA) was abolished as of 6th April 2024, it does still have some relevance.

The LSA is capped at £268,275, which is 25% of the old Lifetime Allowance (£1,073,100)

The Lump Sum Death Benefit Allowance (LSDBA) refers to the total amount of pension wealth that can pass tax-free by way of a ‘death benefit lump sum’ to your chosen beneficiaries on death before the age of 75.

The standard LSDBA uses the value of the former Lifetime Allowance - £1,073,100. However, if you hold transitional protection, protecting your Lifetime Allowance at a higher value, this remains the appropriate figure.

For example, if you hold Fixed Protection 2016, your LSDBA will remain at the higher protected amount of £1,250,000.

Should your total pension wealth exceed the ‘standard’ or ‘protected’ amount on death before age 75 and your pension is paid as a lump sum, your beneficiaries would be subject to income tax at their highest marginal rate on the excess.

If, however, your pension is passed to your beneficiaries as a pension, rather than a lump sum, the amount will not be tested and remains tax-free on death before age 75.

The rules remain the same on death post-75, in that any pension benefits passed as either a lump sum or as a pension will be subject to income tax at your beneficiaries highest marginal rate, either on payment (if received as a lump sum), or upon withdrawal (if received as a pension).

The Benefits of Pension Contributions

Pension contributions come with several valuable benefits that make them an attractive option for long-term savings:

• Tax Relief: Contributions are tax-efficient, with immediate relief for basic rate taxpayers and the ability to reclaim additional tax relief for higher and additional rate taxpayers (20% and 25% respectively).
• Employer Contributions: Some employers offer generous contributions above the statutory minimum (3%), effectively increasing your retirement savings at no extra cost.
• Investment Growth: Pensions are invested in markets and have the capacity to grow over time. Returns are compounded which can be enhanced by regular contributions. 
• Inheritance Benefits: Defined Contribution pension benefits sit outside your estate, meaning they are not subject to inheritance tax on death, resulting in a potential 40% tax saving. 
• Financial Security in Retirement: Maximising your pension contributions throughout your working life helps ensure you have sufficient income to meet your lifestyle requirements in retirement. For most people, the full State Pension (£221.20 per week) is unlikely to be sufficient alone to meet expenditure requirements. 

How much should I pay into my pension? 

How much you should pay into your pension will depend on a number of factors, including your age, earnings and financial goals. 

According to Fidelity International, a rough rule of thumb for determining your ideal pension contributions is to aim to save 10 times your pre-retirement income salary by the age of 67. So, if your average salary is £40,000, it’s recommended that you aim for a pension pot of around £400,000.  

Others say that you should aim to save 12.5% of your monthly salary. If your employer offers a more generous contribution than the statutory 3% then this figure can be reduced accordingly.  

Beyond these generalised points, however, there are a number of factors influencing the amount you should pay into your pension. Below are some of the most important: 

• What is your target income for retirement?   
• What age do you plan to retire? / What timeframe does this give you to save?
• What is your state of health/family history?  
• What level of income/expenditure are you expecting in retirement?  
• Do you have other assets/income that can support you in retirement?  
• Target income is often considered the amount you will need to maintain your current lifestyle. To get an idea of this, you can add up your current monthly expenses and deduct any that will no longer apply by the time you reach retirement (mortgage, commuting costs, etc.).
• Adding in any extra money you anticipate needing - This is for things like holidays, home renovations, or supporting family members, hobbies and interests.  
• Increases to inflation - The cost of living typically doubles every 25 years, so it’s worth incorporating this into any financial projections.  
• Length of retirement - This is a combination of the age you intend on retiring at and how long you expect to live. The latter is obviously a little less predictable, but you can find a good estimate by considering lifestyle factors and family history. 
• How much state pension you will receive - If you qualify for the full new state pension, you will receive £221.20 per week, or £11,502.40 a year for the tax year 2024/25. This is not likely to be enough to live on but could be a good top up tp your personal pension pot and other savings and investments. 

Despite the pension annual allowance of £60,000, if you’re getting close to retirement age, it may still be worthwhile making contributions in excess of this. Despite the annual allowance charge that would apply (ignoring any carry forward allowances), pensions offer additional tax benefits on death, sitting outside of your estate, so they can usually be passed onto your loved one's tax-efficiently.

It’s worth bearing in mind that pensions cannot be accessed before age 55 (57 from 2028), unless you are diagnosed with terminal illness. Therefore, it is important to maintain sufficient funds that can be easily accessed in the short and medium term to facilitate expenditure.  

Does my employer have to pay into my pension? 

By law, all employers must offer a workplace pension scheme. This means that three bodies contribute to your pension: you, your employer, and the government. 

If you qualify for automatic enrolment, then your employer is obliged to enrol you into a pension scheme and make contributions to your pension. If your employer is not obligated to enrol you by law, then you can still opt into their pension scheme — and your employer cannot stop you. 

However, they do not have to contribute if you earn an amount equal to or less than £520 a month, £120 a week or £480 over 4 weeks. 

Once you’re enrolled in your employer’s pension scheme, they must, by law, punctually pay at least the minimum contributions to the pension scheme, allow you to opt out of the pension scheme and refund you the money you’ve paid into it (if you do so within 1 month). Plus, they have to allow you to re-join the scheme at least once a year if you have previously opted out. 

Under no circumstances can your employer try to encourage or coerce you into opting out of the scheme, terminate your employment or discriminate against you if you decide to stay in a workplace pension scheme. Nor can they insinuate that somebody is more likely to get hired if they choose to opt out of the pension scheme or end a workplace pension scheme without automatically enrolling all members into another one. 

So in summary, there is no limit to how much you can pay into your pension. However, the limit for tax free contributions is £60,000 annually, which is known as the pension annual allowance, or 100% of relevant UK earnings (whichever is the lower figure). Exceed this, and you’ll be expected to pay an annual allowance charge. 

How can we help? 

Here at The Private Office, our experienced pension planning advisers can provide you with clear advice on your options for your pension, tailored to your unique circumstances and individual needs. Get in touch to arrange a free initial consultation.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.  

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

Investment returns are not guaranteed, and you may get back less than you originally invested.  

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

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