How can I make the most of the £60k annual pension allowance?

Pension savings have superpowers, and we love investing in pensions. You save on Income Tax, your investments grow in a tax-free environment, you could take up to 25% of the pot tax-free when you retire, and it is not part of your estate when assessed for Inheritance Tax – a great way to pass down assets to the next generation.

That said, there is a limit to how much you could put away in pensions every year, and calculating the annual allowance can indeed be confusing or complicated, especially for higher rate taxpayers such as yourself.

• Tip #1 – Sum up your contributions and gross them up on annual basis (tax year)

As financial planners, we love a spreadsheet. It is the easiest way to plot, tax year by tax year, what pension contributions you have made yourself – that 4% of salary. You could find the total amount for the tax year on your payslip at the end of the tax year, usually March, or alternatively by obtaining a statement from your pension provider. Then you add the government rebate of tax you receive – this is 25% on the amount you have contributed yourself.

E.g. You contribute £8 net + you receive 25% of that from HMRC which is £2 = total saved into your pension is £10 gross. Then you add your employers' contributions – these are always gross, you don’t receive tax rebate on that money - it is free money from the employer as it is.

• Tip #2 – Check your annual allowance

There are two calculations here to make – threshold income, and adjusted income.

Threshold income - deduct your pension contributions from your total income. If you arrive at a number less than £200k, you have your full annual pension allowance – currently £60,000. If you arrive at a number over £200k, your pension annual allowance might be tapered down. You then need to check your adjusted income.

Adjusted income - add your employer’s pension contributions to your total income. If that sum is over £260k, then for every £2 pounds over, your pension annual allowance gets reduced by £1. Maximum reduction is down to £10,000.

• Tip #3 – Now you know your total grossed pension contributions and your pension annual allowance, you could determine whether you have unused allowance or whether you have breached it. Unused allowance could be carried forward from the previous 3 tax years.

Note, the calculations for threshold and adjusted income could become complicated if you are in receipt of income from multitude of sources, benefits such as childcare benefits, and/or if you have salary sacrifice arrangements, as some sources are included in the calculations and others aren’t. It is best if you seek professional advice to make sure the calculations around your specific circumstances and complexity are correct.

Note, there are specific rules around how you use up the carry forward allowance available from the previous 3 tax years – please, seek professional advice to make sure you don't breach the allowance limits. Any contributions above your annual allowance would be subject to tax at your highest tax rate, which would negate the tax advantages of saving into a pension.

Note, for higher-rate taxpayers earning over £100k a year there are arrangements to be made to minimise the income tax payable in some circumstances. A financial planner would be able to analyse and help you utilise these opportunities if applicable to your circumstances.