Pensions lifetime and annual allowances
The income and gains which arise as part of pension savings are generally exempt from Income Tax and Capital Gains Tax. Tax relief for contributions to pension schemes is given at a taxpayer’s marginal rate of Income Tax subject to the annual and lifetime allowances.
The lifetime allowance is the maximum amount of pension and/or lump sum that benefits from tax relief. The maximum lifetime allowance was reduced to £1m from April 2016 (from £1.25m). There are special measures in place to ensure the change is not retrospective. These measures affect those with total UK tax relieved pension savings close to or more than £1 million.
There are three protections available: Individual protection 2016 (IP2016), Fixed protection 2016 (FP2016) and Individual protection 2014 (IP2014). Since 1 August any new application for lifetime allowance protection must be made online. Taxpayers with permanent protection notification numbers are not required to reapply online.
The annual allowance for tax relief on pensions is currently £40,000 and there is a three year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years. Since April 2016, the annual allowance is reduced for high earners with income in excess of £150,000. For every complete £2 their income exceeds £150,000 the annual allowance will be reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.