What happens if I am affected by the pensions contribution cap?

Since April 2014 only £40,000 can be paid into your pension each year before needing to pay tax on it and declare it on a self-assessment tax return. This £40,000 includes all money added – whether that is invested yourself or another party such as your employer.

It is, however, possible to carry over any unused allowance into the next tax year – so if you pay nothing into your pension one year, you’ll be able to pay £80,000 in tax-free the following year. This can roll over up to four times, to a total of £160,000.

This makes keeping an eye on how much you are paying into your pension each year very important, as you could potentially miss out on these tax-free deposits.

Although, there are criteria that prevent you from carrying allowances over. For example, if you have any unused money purchase annual allowance you cannot carry it over.

You are also unable to carry forward unused allowance from tax years in which you were not a member of a registered pension scheme.

There are a few ways in which you can work out how much annual allowance can carry over, such as:

  1. Working out your annual allowance yourself – If you ask your pension providers they should be able to give you all the information you require to calculate how much allowance you have remaining. It is important to note that the 2015/16 tax year’s allowance was £80,000 as the government slowly introduced the current £40,000 threshold.
  2. There are tools available from HRMC that allow you to calculate if you are close to the £40,000 threshold.
  3. Ask your accountant to calculate it for you – a trained financial professional is always the best port of call for any advice on matters such as this.

 At M J Bushell our team of experts are happy to help so please contact us now.

Posted in Blog.