If you exceed the pensions annual allowance or where it applies the money purchase annual allowance, you will be liable to the annual allowance charge. Rather than pay it personally you can ask your pension provider to pay it from your pension funds.
Annual allowance
The amount of tax-relieved contributions you can make in any tax year is restricted further to the available amount of annual allowance (AA) for the tax year in question. The AA is currently £60,000, by reference to the gross contribution, but you can carry forward any unused amount for up to three tax years. The hypothetical maximum contribution in a single tax year is therefore £240,000.
Note. If you are a higher earner, the annual allowance is subject to a tapering reduction, although this will still give a minimum allowance of £10,000.
Annual charge
Sometimes you may make contributions that are in excess of the available AA. Where there’s an excess payment, a special charge is levied.
Essentially, the amount of the excess is added to your taxable income for the year the contribution was made, so it will be taxed at your marginal rate increasing your tax bill for the year. However, it may be possible to avoid the cash-flow hit.
Scheme pays
It’s possible to ask your pension scheme administrator to pay the charge out of the invested funds. It is mandatory for it to make the payment if:
Use our template letter to make the request.