The pension Annual Allowance increased in 2023/24. Have you reviewed your contributions?

The pension Annual Allowance increased significantly in the 2023/24 tax year. If you haven’t already reviewed whether the changes could mean you can tax-efficiently add more to your pension, doing so before the current tax year ends on 5 April 2024 might be beneficial. 

The Annual Allowance is up to £60,000 in 2023/24

The Annual Allowance is the amount you can add to your pension each tax year while retaining tax relief. However, you can only claim tax relief on up to 100% of your annual earnings. 

For the 2023/24 tax year, your Annual Allowance could be up to £60,000, this compares to a maximum allowance of £40,000 in 2022/23. So, if you haven’t assessed your pension contributions for the current tax year, you might want to contribute a lump sum to your pension before 5 April 2024.

Two circumstances might mean your Annual Allowance is lower than £60,000.

  1. If you’ve already taken an income from your pension, you may be affected by the Money Purchase Annual Allowance (MPAA), which is £10,000 in 2023/24. In 2022/23, it was just £4,000. 
  2. The Annual Allowance of high earners may be tapered. If your adjusted annual income, which includes pension contributions, is more than £260,000 your Annual Allowance will fall by £1 for every £2 it exceeds this threshold. The Annual Allowance can be reduced by a maximum of £50,000 in 2023/24. So, if your adjusted income is £360,000 or more, your Annual Allowance would be £10,000. Again, this has increased from £4,000 when compared to 2022/23.

So, even if you’re not entitled to the full Annual Allowance, the amount you could tax-efficiently add to your pension may have increased this tax year.  

As a result, there might be an opportunity to save more tax-efficiently for your retirement. 

You can carry forward your unused Annual Allowance for up to three tax years. Hence, it may be useful to review your past pension contributions too – you have until 5 April 2024 to use your Annual Allowance from the 2020/21 tax year. 

4 financially-savvy reasons you might want to boost your pension contributions 

1. Pension contributions benefit from tax relief 

Pensions are often tax-efficient because your contributions may benefit from tax relief. As a result, some of the money you would have paid in tax is added to your pension. 

Tax relief is given at the highest rate of Income Tax you pay. So, if you boosted your pension by £100, you’d receive an extra £25 if you’re a basic-rate taxpayer. Tax relief can be even more valuable if you’re a higher- or additional-rate taxpayer. 

In most cases, your pension provider will claim tax relief at the basic-rate on your behalf. If you’re a higher- or additional-rate taxpayer, you’ll usually need to complete a self-assessment tax form to claim the full amount you’re entitled to.

2. Your employer may match increased pension contributions 

If you’re employed, your employer will usually have to contribute to your pension on your behalf. The minimum employer contribution level is 3% of your pensionable earnings.

However, some employers will increase how much they contribute if you do. If your employer offers this as a perk, even a small increase in how much you’re adding to your pension each month could potentially give you more flexibility in retirement. 

3. Returns on investments held in a pension aren’t liable for Capital Gains Tax

Returns from investments that aren’t held in a tax-efficient wrapper, like a pension, may be liable for Capital Gains Tax (CGT) if they exceed the annual exemption, which is £6,000 in 2023/24 and falling to £3,000 in 2024/25. 

If you’re investing for your retirement, doing so through a pension could make financial sense from a tax perspective.

You should keep in mind that once you start taking an income from your pension, withdrawals may be liable for Income Tax.

4. Long-term investments may benefit from the effects of compounding 

As you typically can’t withdraw money from a pension until you reach 55, rising to 57 in 2028, your investments may benefit from the effects of compounding.

The returns your pension investments earn will go on to be invested themselves and, hopefully, deliver further returns. Over a long time frame, this can help your savings start to grow at a faster pace.

As you could be saving into your pension for decades, compounding could lead to the value of regular contributions and one-off lump sums growing significantly. 

Contact us to talk about your pension and retirement plans 

If you’d like to understand if you’re on track for retirement or if increasing pension contributions is right for you, please get in touch. We’ll work with you to create a bespoke retirement plan that aligns with your long-term goals and current financial situation. Please contact us to arrange a meeting. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

Speak with our Financial Planners today

Related blog posts

Economic Review – August 2022

The latest gross domestic product (GDP) statistics show the UK economy grew unexpectedly in May although forward-looking indicators still point to a deteriorating outlook. In…

Read More

Economic Review – July 2022

The latest gross domestic product (GDP) statistics show the UK economy unexpectedly shrank in April, increasing concerns about future growth prospects. In our economic update…

Read More

Guide: Everything you need to know about annuities when creating a retirement income

When you retire, you will often have a range of choices available to you about how you access your pension. One such method is an…

Read More

Wealth Management for Entrepreneurs and Executives

  The wealth management market is very much segmented and filtering through this to assess the best service, relationship, cost, security, and breath of offering…

Read More

Why use a Financial Adviser?

  In our case study below, we run through the scenario of some new clients who thought they could manage their portfolio themselves. However eventually…

Read More

How do you find a lost pension?

  Research by the Association of British Insurers (ABI) conducted in 2018 found there were approximately 800,000 lost pensions in the UK which amounted to…

Read More
Coming to a crossroads in life

Financial Planning as a result of selling a limited company

Selling shares in a construction company John had a business in construction that he owned with two co-directors. They decided to sell the business as…

Read More

Planning for Retirement

Self-employed, with a number of pensions Spencer is 65 and lives in Worthing with his wife.  He is a self-employed carpenter. Spencer came in to…

Read More

Michael and Mandy

Michael and Mandy are 46 and 43 respectively, and own a business in Worthing. They were in the process of buying the business from the…

Read More