Pensions – the 2021 Annual Allowance review

The Pensions Annual Allowance is the maximum amount you can contribute to your pension each year while still receiving tax relief. For the 2021/22 tax year, this remains at £40,000 for most people.

However, for high earners with an 'adjusted income' over £240,000, the allowance is tapered down, potentially to as low as £4,000. Understanding how the taper works and utilising 'carry forward' from previous years can help you maximise your pension contributions while avoiding unexpected tax charges.

How the taper works

The tapering rules are notoriously complex. If your 'threshold income' (broadly, your total taxable income excluding pension contributions) exceeds £200,000, and your 'adjusted income' (your threshold income plus the value of your pension contributions) exceeds £240,000, your annual allowance is reduced by £1 for every £2 your adjusted income exceeds £240,000. This continues until the allowance reaches a minimum of £4,000.

The carry forward rules

If you have not used your full annual allowance in the previous three tax years, you can 'carry forward' the unused amount to the current year. This is a powerful tool for high earners who may have been caught by the taper in some years but not others, or for business owners who want to make a large one-off employer contribution in a highly profitable year. However, you must have been a member of a registered pension scheme in those previous years to use carry forward.

The Lifetime Allowance

While maximising contributions is generally beneficial, you must also keep an eye on the Lifetime Allowance (LTA), which is currently frozen at £1,073,100. If the total value of your pension benefits exceeds this amount when you draw them (or reach age 75), you will face a significant tax charge on the excess. Careful forecasting is required to ensure you do not inadvertently breach this limit.