Pension premium record

Knowing how much has been contributed to your pension plan in any tax year is important so that you can calculate any higher or additional rate tax relief you’re entitled to and check that you’ve not exceeded the maximum for which tax relief is allowed (the annual allowance).

Keeping tabs on your contributions

For final salary pension schemes (also known as defined benefit schemes) the amount of contribution can only be calculated by the scheme administrator, but for money purchase schemes such as personal pension plans (also known as defined contribution schemes) the contribution is equal to the amount paid into the scheme.

What to record

All contributions paid to a pension scheme count towards the annual allowance (AA) of £60,000 for 2023/24 and later years (£40,000 previously). They can be paid by you, another person, e.g. a relative, or by your employer.

When you or another person pays into your pension plan tax relief at the basic rate (20%) is added by HMRC. For example, if you pay £80 HMRC will add £20 bringing the total to £100 (the gross contribution). This is the amount to record. If you contribute to a workplace pension through your salary your employer will deduct the contribution before working out tax on your pay (this is referred to as a net pay arrangement) so no further tax relief is due. However, you should still keep a record of the contribution. You can find the amount of contributions on your payslips.

Where your employer contributes directly to your pension fund no tax relief is added by HMRC. Therefore, the amount to record is the amount paid by your employer, who must tell you how much they’ve paid. This has become especially important since the introduction of auto-enrolment which requires all employers to contribute to pensions for all employees who belong to the workplace pension.

Tax relief

If you are a higher or additional rate taxpayer you can claim further relief on contributions to your pension plan paid personally or by another individual. This can be claimed either by reporting the premiums on your self-assessment tax return or, if you’re not required to complete one, by writing to HMRC.

Annual allowance

Where the total of all pension contributions exceeds the AA, you might be liable to an AA charge. This claws back the tax relief on the excess contributions.

Where all contributions to your pension are less than the AA for a year, the difference can be carried forward to any of the three following years and added to the AA for that year. You only carry forward unused AAs from a year if you had an active pension scheme in that year.

Example

Ann starts a pension plan for the first time in 2021/22 and contributes £10,000; her employer contributes £2,000. This is repeated in 2022/23. Therefore, for each of those years Ann has unused AA of £28,000. In 2023/24 she receives a windfall and uses it to pay £80,000 (gross) into her pension plan. This exceeds her AA by £20,000 (£80,000 - £60,000). The unused relief from the earliest year (2021/22) of £28,000 is used to cover the £20,000. If necessary, the remaining £8,000 could be used to cover excess contributions for 2024/25, but not later.

Tapered annual allowance

AA tapering refers to the reduction of the allowance if you have high income. Tapering reduces the AA where your income exceeds two limits: the adjusted income limit and the threshold income limit. Where both thresholds are exceeded the AA is reduced by £1 for each £2 of excess. The minimum that the AA can be reduced to is £10,000 (£4,000 for 2020/21 to 2022/23).

Note that if the MPAA applies no tapering is required as the allowance is already £10,000.

For pension allowance tapering, you must first work out your “net income”. This is your total taxable income after knocking off deductions, e.g. business trading loss relief. You must then calculate your:

• adjusted income (AI): this is your net income plus any contributions paid for you by your employer, less tax deductions and pension contributions where you did not receive relief at source on them; and
• threshold income (TI): this is your net income, less pension contributions paid by you where you received basic rate tax relief at source, plus the value of any salary sacrifice arrangement that began on or after 8 July 2015.

HMRC includes a detailed guide to working out each of these amounts at https://tinyurl.com/46pd2tww.

While unused MPAA for one year cannot be used to increase the AA or MPAA for later years, unused tapered AA can. For example, if your AA for 2022/23 was tapered to, say, £25,000, you paid £10,000 into a pension scheme and your employer £6,000, it would mean £9,000 of your tapered AA was unused and can be used to increase your AA for 2023/24 or if not used then 2024/25 or if still not used, 2025/26.

The limits are:

•         AI of £260,000 (£240,000 for 2020/21 to 2022/23); and

•         TI of £200,000.

If both limits are exceeded, the taper reduces your AA by £1 for every £2 that the AI exceeds £260,000 (£240,000 for 2022/23).

For example, your income exceeds the threshold limits for 2023/24 and your AI is £290,000. The excess income is £30,000 (£290,000 - £260,000) and so your AA of £60,000 is reduced by £15,000 (£30,000 / 2) to £45,000.

Money purchase annual allowance

If you have drawn money from one or more of your money purchase pension funds on or after 6 April 2015 using pensions freedom (also known as flexible pensions) a special AA applies, the money purchase annual allowance (MPAA). The MPAA is £10,000 (£4,000 between 2017/18 and 2022/23 inclusive). Unused money purchase AAs from one year cannot be carried forward and used in later years.

How do I use the record?

The Pension Premium Record allows you to go through your payslips and bank statements and record the amount of each type of contribution for every month of the tax year. You can then give this to your accountant - or use it to help complete your own tax return.