So someone who earns £35,000 could pay a maximum of £28,000 themselves, which would be topped up with basic-rate tax relief of £7,000. Even if you are not earning you can save £3,600 a year into your pension, including tax relief, as long as your scheme operates on a “relief at source” basis.
“Relevant earnings” include basic pay, bonuses, commissions, sick pay, benefits in kind such as medical insurance, income from holiday homes and a whole host of other sources of income. All private pension savings count towards the annual allowance.
But people with entitlement to “defined benefit” schemes – where retirement income is guaranteed and based on salary and length of service – have an extra hurdle to clear. It is straightforward to see how much you have contributed to a “defined contribution” or “money purchase” pension plan, but the calculation for defined benefit schemes is extremely challenging.
It involves working out how much your entitlement has increased by since the last tax year, taking into account inflation, multiplying by 16 and noting any lump sums paid by the scheme. Ordinary savers should not attempt to do this calculation unaided.
Instead, write to all the schemes you have ever been a member of and they will do it for you. It may take your scheme some time to reply – so if you plan to take advantage of unused allowances this tax year, get in contact as soon as possible.
Once you have both defined benefit and money purchase pension contributions, use HMRC’s online tool to calculate how much of your annual allowance you have left to use.
An HMRC spokesman said: “99 per cent of people remain unaffected by the annual allowance charge, as they have either carried forward unused allowances from earlier years or have adjusted how much they put in their pension pots.
“The annual allowance and lifetime allowance help to manage the costs of the system and target the relief at those who need it most.”