October 2018


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Look before you leap – testing the depth of annual allowance

2 January 2018

You wouldn’t dive in to a swimming pool before checking there was enough water below the surface.  So why would you dive in to paying an individual pension contribution before checking you had sufficient annual allowance?

Let’s look at how you would work out the maximum individual pension contribution for a client who already contributes to their employer’s defined benefit scheme.  There are usually two calculations required, one to check the maximum that can be paid for tax relief and the second to check for available annual allowance.

Defined benefits and the Money Purchase Annual Allowance

One important point to note here is that someone with a defined benefit (DB) pension (either accruing benefits or receiving DB pension benefits) is broadly unaffected by the Money Purchase Annual Allowance (MPAA).  You can read more about the MPAA  in our technical centre.  Taking a pension commencement lump sum and scheme pension from a defined benefits scheme does not trigger the MPAA for future pension savings.  If your client has flexibly accessed money purchase benefits and triggered the MPAA, any defined benefit pension input amounts are NOT tested against the MPAA.  These are tested using the alternative annual allowance (the standard annual allowance, or tapered annual allowance where one applies, less defined contribution inputs paid up to £4,000 for tax year 2017/18), including any available carry forward of unused annual allowance.

Tax relief

The first consideration is tax relief and the usual rules apply.  An individual is entitled to tax relief on a contribution of up to £3,600 gross pa, or 100% of their relevant earnings in the tax year if greater.  You must take in to account any personal contributions they already pay to any other pension scheme.  One important point is that employer contributions are ignored for the purpose of looking at this tax relief rule.  Employer contributions will benefit from corporation tax relief where the wholly & exclusively rule is satisfied.

Annual allowance

Next you should check for available annual allowance. Does your client have the standard annual allowance or are they subject to a tapered annual allowance?  Have they triggered the MPAA which applies to defined contribution savings?  What are the pension input amounts for any other pension saving made in this tax year?  For a DB scheme it is the increase in pension entitlement for the year multiplied by 16 rather than the monetary contribution amount that is tested against the annual allowance.  Full details of this calculation are set out in HMRC guidance.

Now compare the proposed personal contribution amount with the available annual allowance.  You’ll have two possible outcomes.  Either the individual will have sufficient remaining annual allowance (including carry forward where eligible) to absorb the proposed new contribution amount or, they won’t.

Case study

Doug is an active member of his employer’s defined benefit pension scheme.  Doug pays a 3% employee contribution based on his pensionable salary of £37,500.

Calculation one – tax relief

This means Doug already pays £1,125 to the DB scheme therefore, to be eligible for tax relief, he can only pay up to a maximum of (£37,500 – £1,125) £36,375 gross to a personal pension plan.

Calculation two – annual allowance

Now let’s say his DB pension input amount for tax year 2017/18 is estimated at approximately £11,000.  He has fully used his annual allowance for previous years so has no carry forward available.

Therefore, available annual allowance is £40,000 less the DB pension input amount for the current tax year of £11,000 leaving £29,000.


The remaining annual allowance is less than £36,375. This means Doug could pay up to £36,375 and receive tax relief on the whole amount. However, you know that his total pension savings would then exceed his available annual allowance and Doug would have to report the excess above his available AA and declare the related tax charge.  An AA excess/ charge reduces the tax efficiency of making this level of personal contribution.

In this scenario it may be more appropriate to limit the individual pension contribution to £29,000 gross as this will receive tax relief without causing any annual allowance excess.

As always, there will be exceptions to the rule.  There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess.  This would be the case if the individual wanted to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc.  Some of these planning angles are covered in our technical centre.


You don’t want to dive in with a personal contribution amount until you have fully considered the tax efficiency of such pensions saving.

You always need to apply the tax relief rules to work out the maximum personal contribution which would be allowed tax relief, but it is equally important to go on to check the available annual allowance.  Doing both tests is the only way to ensure any individual pension contribution is paid as tax efficiently as possible.

Related information

You can find more details for tax relief on member contributions here

We have recently revamped the format of our annual allowance, carry forward and tapered annual allowance articles, please take a look and send us some feedback.

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