Pensions can benefit from some favourable tax conditions, for example they grow free from capital gains tax and you may be able to take a 25% tax free lump sum when you begin drawing down on the pension (PCLS).
Are UK pension contributions tax free?
Contributions made within any given tax year that are within your annual allowance, are tax free up to certain limits. The annual allowance is currently £40,000. This includes any contributions made by you or anyone else on your behalf into defined contribution pensions, and any increase in a defined benefit scheme in a tax year.
Your annual allowance can be rolled over for up to 3 years, meaning if one year you contribute £20,000, the next you can contribute £60,000 without triggering a tax charge.
If you have accessed your pension or earn over £200,000 per year, then your annual allowance may be lower. In the event that you contribute over your annual allowance, you should be notified by the scheme. If you have multiple defined contribution schemes, then this can become complicated as you will need to calculate for yourself based on your statements from each scheme. This can be one reason why people consolidate their pensions into one place.
You usually pay tax if savings in your pension pots go above:
- 100% of your earnings in a year – this is the limit on tax relief you get
- £40,000 a year – check your ‘annual allowance’
- £1,073,100 in your lifetime – this is the lifetime allowance
Are UK pension lump sums taxable?
You can usually take up to 25% of the amount built up in any defined contribution scheme as a tax-free lump sum. The tax-free lump sum doesn’t affect your Personal Allowance. A member of a defined benefit scheme may be able to give up 25% of their annual income from the scheme in exchange for a lump sum. This is known as a Pension Commencement Lump-Sum (PCLS).
For more information check out our videos explaining pensions in more detail (The exact amounts stated in this video may have changed since it was made):
Who to contact about a UK pension?
Pensions and Tax can both be complicated areas of financial planning. Assessing all the available options with regards to a UK pension and understanding your tax situation is essential for anyone who has a pension. These things can be further complicated when an individual is residing outside the UK. Our independent advisors are industry leading pension specialists and would be happy to help you better understand your options.
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