How Much Can I Pay Into My UK Pension?

The funds you set aside in a pension plan grow over time, aiming to provide a steady income when you stop working. Understanding the regulations that dictate how much you can save into your pension annually is part of this process. These rules set a framework for tax-privileged investment. This guide provides an overview of the contribution limits to help you navigate the system.

The Standard Pension Contribution Limits

For the 2024/2025 tax year, the primary cap on pension contributions is the Annual Allowance, set at £60,000. This figure represents the total amount that can be contributed to all of your pension schemes in a tax year without incurring a tax charge. This allowance includes all contributions: your own, those from your employer, and any from third parties.

A second rule links personal contributions directly to your income. You can receive tax relief on personal contributions up to 100% of your relevant UK earnings for the tax year. If your earnings are below the Annual Allowance, your earnings level becomes your effective limit for personal contributions, as this is the maximum on which you can receive tax relief.

These two rules interact to define your contribution capacity. For instance, an individual earning £40,000 a year can contribute up to £40,000 personally, as this is 100% of their earnings and is below the £60,000 Annual Allowance. In contrast, someone earning £80,000 is limited by the £60,000 Annual Allowance. Any contributions exceeding your available Annual Allowance are subject to a tax charge, which neutralizes the tax relief on the excess amount.

A provision exists for individuals with low or no UK earnings. They are permitted to contribute up to £3,600 gross per tax year and benefit from tax relief. This means a payment of £2,880 is made into the pension, with the government adding £720 in basic rate tax relief to bring the total contribution to £3,600.

Defining Relevant UK Earnings for Contributions

To apply the 100% of earnings rule, you must understand what the government classifies as “relevant UK earnings.” This definition determines the maximum value of personal contributions on which you can receive tax relief, making it a key detail in the contribution process.

Income that qualifies as relevant UK earnings includes employment income, such as your salary, wages, and bonuses. It also encompasses taxable benefits in kind, which are non-cash perks from an employer. For the self-employed, profits chargeable to income tax from a trade or profession are included in this category.

Conversely, several common sources of income are excluded from the definition of relevant UK earnings. Investment income, such as dividends and interest from savings accounts, does not qualify. Income generated from renting out property is also not considered relevant UK earnings, nor is any income you are already receiving from a pension.

Contribution Allowances for High Earners and Flexible Access

The standard £60,000 Annual Allowance can be reduced for high earners or those who have started to access their pension savings flexibly. These reductions are governed by two distinct rules: the Tapered Annual Allowance and the Money Purchase Annual Allowance (MPAA).

Tapered Annual Allowance

For high earners, the Tapered Annual Allowance reduces the standard £60,000 limit. This is triggered when two income thresholds are crossed. The first, “threshold income,” is your total taxable income less certain personal pension contributions, with a threshold of £200,000 for the 2024/2025 tax year.

The second measure is “adjusted income,” your total taxable income plus all employer pension contributions, with a threshold of £260,000. If both income levels are exceeded, your Annual Allowance is reduced by £1 for every £2 your adjusted income is over £260,000, down to a minimum of £10,000. For example, an individual with an adjusted income of £300,000 is £40,000 over the limit, resulting in a £20,000 reduction (£40,000 / 2). This leaves them with an Annual Allowance of £40,000.

Money Purchase Annual Allowance

The Money Purchase Annual Allowance (MPAA) applies once you take income from a defined contribution pension in specific ways. Triggering events include taking an uncrystallised funds pension lump sum (UFPLS) or income from a flexi-access drawdown fund. The MPAA for the 2024/2025 tax year is £10,000.

Once triggered, the MPAA replaces the standard Annual Allowance for all future contributions to defined contribution schemes. This is a permanent change that restricts your tax-relieved savings to £10,000 annually. A consequence of triggering the MPAA is that you can no longer use the “carry forward” rule for your defined contribution pensions.

Increasing Contributions with Carry Forward

You can contribute more than the standard Annual Allowance in a single tax year by using the “carry forward” rule. This allows you to utilize any unused Annual Allowance from the three previous tax years. This is useful for those who wish to make a larger payment after a year of lower contributions.

To be eligible, you must have been a member of a registered pension scheme during the years from which you wish to carry forward unused allowance. The total contribution in the current tax year, including the carried-forward amount, cannot exceed your relevant UK earnings for the current year.

The calculation is sequential. You must first use all of your Annual Allowance for the current tax year. You can then draw upon unused allowance from the three preceding tax years, starting with the earliest year first. For the 2024/2025 tax year, you would use any unused amount from 2021/2022, then 2022/2023, and finally 2023/2024.

Consider an individual who contributed £30,000 in each of the last three tax years, when the annual allowance was £40,000 in 2021/22 and 2022/23 and £60,000 in 2023/24. This would give them £10,000 of unused allowance from 2021/22, £10,000 from 2022/23, and £30,000 from 2023/24. In the 2024/2025 tax year, they could contribute their £60,000 allowance plus the £50,000 of unused allowance, for a total of £110,000, provided their relevant UK earnings are at least that amount.

How to Make Pension Contributions

Once you determine how much you can contribute, the next step is making the payment. The methods for contributing vary between pension providers, so you should confirm the options for your scheme. Common methods for personal contributions include setting up a regular payment via direct debit or making a one-off lump sum payment. To proceed, contact your pension provider to confirm their accepted payment methods and get the necessary details.

The application of tax relief on your personal contributions is handled through one of two systems. The most common for personal pensions is “relief at source.” Under this method, you make contributions from your post-tax income, and your pension provider claims the basic rate tax relief (20%) from the government on your behalf. If you are a higher or additional rate taxpayer, you must claim the additional relief through your self-assessment tax return.

The other system is the “net pay arrangement,” which is used by workplace pension schemes. With this method, your employer deducts your pension contributions from your salary before income tax is calculated. This means you receive full tax relief immediately at your marginal rate of tax, without needing to make a separate claim.