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The present, ‘simplified’, pension rules have been in place since 2006-07. Previously, there were different rules for personal pension and occupational pension schemes, with the rules for personal pension scheme savings being particularly complicated. 

The amount of pension savings that can qualify for tax relief was then substantially reduced from 2011-12. The current tax year has seen the introduction of pension flexibility, but also an anti-avoidance money purchase annual allowance to prevent this flexibility being exploited. From next year, there will be a tapered reduction to the annual allowance for people with income in excess of £150,000. 

Annual allowance

Any amount can be contributed into a pension scheme, but tax relief is restricted to the lower of earnings and an annual allowance. The annual allowance peaked at £255,000, but was reduced to £50,000 for 2011-12, 2012-13 and 2013-14. It has been further reduced to £40,000 from 2014-15 (although see the section on pension input periods in regard to the transitional rules for 2015-16). Pension savings made within the £40,000 limit qualify for tax relief at a person’s highest marginal rate of tax, be it the basic rate of 20%, the higher rate of 40% or the additional rate of 45%.

If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years. Carry forward is only available if a person was a member of a pension scheme for a particular tax year. Therefore for any year in which a person was not a member of a pension scheme the annual allowance is lost. However, it is not necessary to be an active scheme member for a particular year, because the definition of a member includes a deferred member (someone not currently making or building up new pension savings) and a pensioner member (someone who is receiving their pension). The carry forward rules protect people, especially employees, who exceed the £40,000 annual limit due to a one-off ‘spike’ in pension savings. 

The carry forward from 2012-13 and 2013-14 is based on the annual allowance of £50,000 applicable to each of those years. For example, a person has made pension savings of £42,000 for 2012-13, £38,000 for 2013-14 and £32,000 for 2014-15. There are unused allowances of £28,000 (£8,000 (£50,000 - £42,000) from 2012-13, £12,000 (£50,000 - £38,000) from 2013-14 and £8,000 (£40,000 - £32,000) from 2014-15). With the annual allowance of £40,000 for 2015-16, it is possible to make pension savings of up to £68,000 for 2015-16 (although this might be higher given the transitional rules). This is subject to having sufficient income to benefit from the relief. 

The annual allowance for the current tax year is utilised first and then any unused allowances from earlier years - with those from the earliest year used first. Therefore, if in the above example pension savings of £44,000 were made for 2015-16, the unused amount carried forward to 2016-17 would be £20,000. The annual allowance for 2015-16 is fully used, with the balance of £4,000 utilising some of the unused allowance for 2012-13. The unused allowances of £12,000 for 2013-14 and £8,000 for 2014-15 are carried forward.

Pension flexibility

Since 6 April 2015, people have had complete flexibility when accessing their pension funds in personal pensions and other defined contribution schemes at age 55. Apart from a traditional annuity, there are now two main approaches to accessing a pension fund:

  • 25% of the pension fund can be taken tax-free (known as a pension commencement lump sum), with the remainder of the fund available to be drawn as income (and taxed accordingly) on a completely flexible basis. The pension fund is crystallised (or vested).
  • Withdrawals can be taken from the pension fund as desired, with 25% of each withdrawal tax-free and 75% as income (and taxed accordingly). The pension fund is left uncrystallised. 

Without an anti-avoidance measure, it would be possible for a person aged 55 to keep opening new pension schemes, benefit from tax relief, and then immediately withdraw the pension fund with 25% being tax-free. 

Therefore, a money purchase annual allowance applies once a pension fund has been accessed flexibly. The money purchase annual allowance is not applied if just a pension commencement lump sum is taken without any further income being drawn. The money purchase annual allowance is £10,000 rather than the normal £40,000.

Pension input periods

The annual allowance is not measured against pension savings actually paid in a tax year, but is instead measured against the savings for a pension input period. From 6 April 2016, all pension input periods will be aligned with the tax year and it will not be possible to vary this period. Pension input periods will then cease to have much relevance.

Up to and including 2014-15, it was the pension input period ending within the tax year that was relevant. For example, a person’s pension scheme has an input period that ends on 30 November. For 2014-15, the relevant input period would have been that ending on 30 November 2014, and pension savings made during this period would have been used to determine if the annual allowance for 2014-15 had been exceeded. However, it would have been the pension savings actually paid during the tax year (6 April 2014 to 5 April 2015) that would have been used in calculating the tax liability for 2014-15. 

For 2015-16, complicated transitional rules apply. All pension input periods are treated as ending on 8 July 2015 (the date of the summer Budget), with the next input period running from 9 July 2015 to 5 April 2016. This means that people will have two or three input periods ending during 2015-16, and these will often total more than 12 months. To protect against an annual allowance tax charge arising (see later), the transitional rules provide for an annual allowance of £80,000 for 2015-16. However, only £40,000 of this can be used against pension savings for the 9 July 2015 to 5 April 2016 period.

Continuing with the previous example, the pension input periods for 2015-16 will run from 1 December 2014 to 8 July 2015 and from 9 July 2015 to 5 April 2016 – a total of 16 months.

Of course if an input period already ended on 5 April, the input periods for 2015-16 (6 April to 8 July 2015 and 9 July 2015 to 5 April 2016) will total 12 months. However, the £80,000 transitional annual allowance is still available. So whatever pension savings have been made in the period 6 April to 8 July 2015, a further £40,000 can be paid before 5 April 2016 – subject to the overall maximum of £80,000.

Pension savings

For personal pensions and other defined contribution schemes, the amount of pension saving for a particular pension input period is simply the gross amounts paid during that period including any contribution from an employer. For example, an employee with an annual salary of £200,000 contributes 4% into his employer’s defined contribution scheme. The employer contributes a further 6%. The pension savings are £20,000 (£200,000 x 10%).

For defined benefit schemes, the rules are more complex - especially so for 2015-16 given the transitional pension input period rules. For a particular pension input period, the amount of pension saving is found by comparing the notional capital value of the pension at the end of the period to what it was at the start of the period. A standard valuation factor of 16 is used in these calculations. The opening capital value is normally increased by the 12 month increase in the Consumer Price Index for the September prior to the tax year, but for 2015-16 this has been replaced by a higher figure of 2.5% to compensate for the fact that pension input periods will often total more than 12 months. The increase in value over the period is the amount of pension savings for that period.

For example, an employee is a member of a final salary scheme that will provide her with a pension of 1/60th of salary for each year of service. The pension input period is the 12 months to 5 April 2016. On 6 April 2015, the employee’s salary was £80,000 and she had 20 years of service. By 6 April 2016, her salary had increased to £84,000. The calculation is:

Swipe to view table


Opening value

Notional capital value £80,000 x 20/60 x 16 426,667
Percentage increase at 2.5%  10,667
Closing value  
Notional capital value £84,000 x 21/60 x 16 470,400
Increase  33,066

For 2015-16, the employee’s pension savings for annual allowance purposes are therefore £33,066. This is much higher than the employee’s actual contributions (probably in the region of £5,000) qualifying for tax relief.

The figure of £33,066 should strictly be apportioned between 6 April to 8 July 2015 and 9 July 2015 to 5 April 2016, but it does not make any difference where the maximum annual allowance of £40,000 for the 9 July 2015 to 5 April 2016 period is (obviously) not exceeded. 

Annual allowance tax charge

Where pension savings are made in excess of the annual allowance (including any brought forward allowances), then the surplus amount is subject to an annual allowance tax charge. This charge is at a person’s marginal rate of income tax. 

For example, for 2015-16 a self-employed person has taxable income of £200,000. She paid gross personal pension contributions of £54,000 in respect of the pension input period 9 July 2015 to 5 April 2016, and no brought forward relief is available - so the surplus amount is £14,000 (£54,000 - £40,000). The higher rate band will be increased to £204,000 (£150,000 + £54,000), so £4,000 (£204,000 - £200,000) of the surplus amount is taxed at the higher rate of 40% with the remainder taxed at the additional rate of 45%. Therefore, the annual allowance tax charge for 2015-16 is £6,100 ((£4,000 at 40%) + (£10,000 at 45%)).

Previously, the complicated pension input period rules meant that with an annual allowance of just £40,000, it was very easy for a person to inadvertently incur an annual allowance tax charge, especially where an employee changed employments. The alignment of input periods to tax years will make it much easier for people to understand how much they can pay into their pension each year.

Lifetime limit

The lifetime allowance for 2015-16 is £1,250,000. This allowance applies to the total funds that can be built up within a person’s pension arrangements, and there will be a tax charge when that person subsequently withdraws the funds in the form of a pension if the limit is exceeded.

The lifetime allowance will be reduced to £1,000,000 from 6 April 2016.

Tapered reduction

From 2016-17, a tapered reduction to the amount of the annual allowance of £40,000 is to be introduced for individuals with adjusted income of over £150,000. Adjusted income includes the value of any employer pension contributions in order to prevent avoidance via the use of salary sacrifice arrangements.

The annual allowance of £40,000 will be reduced by £1 for every £2 that adjusted income exceeds £150,000, down to a minimum annual allowance of £10,000. Therefore, anyone with adjusted income of £210,000 or more will only receive the £10,000 minimum.


Although saving for a pension is a long-term financial commitment, such planning has often been undermined by the frequent changes to the rules regarding the amount of pension savings qualifying for tax relief. And further changes could be on the way because the Government is consulting on whether there is a case for completely reforming tax relief on pension contributions.