Annual limit for pension contributions

We are often asked about how pension scheme members can maximise their pension contributions, taking into account the annual allowance, tapered annual allowance, and the impact of the money purchase annual allowance.  However, so far as member pension contributions are concerned, there is also a separate limit, the “annual limit,” which is sometimes overlooked.

The annual limit sets the maximum amount of pension contributions that a member can pay, which qualifies for tax relief. The annual limit is defined in the Finance Act 2004 as the greater of:

• The ‘basic amount’ – currently £3,600, or
• The amount of the member’s relevant UK earnings that are subject to tax relief.

The basic amount

These amounts are gross, so for a pension scheme that claims relief at source, the contribution should be paid net of basic rate tax at 20%.  This means that for an individual without relevant UK earnings, the net contribution to meet the basic amount is £2,880.

Contributions qualifying for relief at source include those paid by third parties on behalf of pension scheme members, providing valuable planning opportunities for children and non-working spouses (although contributions paid after age 75 are not relievable).  The new flexibility with our pension wrapper fee can make these smaller value accounts look even more attractive.

Relevant UK earnings

Relevant UK earnings cover a very broad range of income including:

• Employment income (pay, wages, bonuses etc)
• Income from a trade or profession or vocation chargeable under part 2 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
• The part of a redundancy payments above the £30,000 tax exempt threshold
• Taxable benefits in kind
• Permanent health insurance payments paid by an employer.

Refunds of excess contributions

Generally, contributions that exceed the available annual allowance cannot be refunded.  Instead, the member must pay the annual allowance charge.  However, contributions that exceed the annual limit can be repaid as a ‘refund of contributions excess lump sum’.

As the refund can only be paid on contributions that do not qualify for tax relief, the excess amount can only be determined after the end of the tax year in which the contribution was paid, and any tax relief claimed on the excess will need to be returned by the scheme administrator.

Members must claim the refunds within six years of the year-end in which the contributions were paid.  The Transact Personal Pension and SIPP only accept member contributions if they qualify for relief at source and members are required to reclaim and excess contributions.

Example

In the 2024/25 tax year, Simon pays a net contribution of £40,000 into the Transact Personal Pension Plan.  Relief at source is obtained on the contribution, bringing the gross amount to £50,000.  At the end of the tax year, Simon’s relevant UK earnings amounted to £40,000, meaning that £10,000 of the contribution does not qualify for tax relief and must be refunded.  Simon is eligible for a refund of £8,000, and the scheme administrator will repay £2,000 of tax relief back to HMRC.

Applying for a refund

If you have any clients who have contributed more than the annual limit, they should complete and return our ‘Refund of Excess Contributions – Lump Sum’ form (reference T064).

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

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