Pension tax limits

Tax and your pension

Tax and tax allowances on your pension savings can be complicated. It’s important to know the basics, so you understand how this might affect your pension and how you save for the future.

So here’s a simple explanation of the main pension tax allowances you should know about, and a brief summary of how they could affect you and your pension savings.

Increasing your pension savings with tax relief

The great advantage of saving for retirement in a pension, is that some of the money that would normally have gone to the government in tax, goes towards your pension instead and increases your savings.

You can put as much money as you want into your pension, but there are limits on the amount of pension savings that can benefit from tax relief each year, and over your lifetime, before you have to pay tax. You can read more about these limits under tax allowances below.

Video: Understanding tax relief

Watch this short video to learn more about tax relief.

Tax allowances affecting pension savings

The main tax allowance which could affect you is likely to be the Annual Allowance (AA).
The Lifetime Allowance (LTA) and the Tapered Annual Allowance (TAA), may also apply to high earners.
The Money Purchase Annual Allowance (MPAA) is only triggered if you start to take money from a defined contribution (DC) pension pot in a flexible way such as using drawdown. You should notify Railpen if you trigger the MPAA in another scheme.

Current tax allowances

The AA is the limit on your pension savings that can benefit from tax relief each year. The most you can save tax-free towards all your pension arrangements in a single tax year, is the lower of either 100% of your earnings, or the amount the AA is set at for that tax year. The AA for 2023/24 is £60,000.

The LTA is the maximum amount you can save into all your pensions throughout your working life before you need to pay tax. It affects those with the largest pension savings. For the tax year 2023/2024, it was set at £1,073,100. You have to pay tax on any pension savings you have that are over the LTA limit. The amount of tax you owe will depend on your income tax rate, rather than the LTA charge that was in place before 5 April 2023.

The TAA is a lower Annual Allowance and may affect you if your taxable income is over £200,000.

The MPAA is currently set at £10,000 and may be measured against any DC contributions you make.

Gov.uk

For the latest tax allowances visit the government website.

Visit website

Going over the Annual Allowance

If your pension savings in the Railways Pension Scheme are greater than the AA, or the MPAA applies and you exceed it, then we will send you a Pension Savings Statement (PSS) that will detail how much of the AA you have used.

You can apply to carry forward any AA that you haven’t used from the previous 3 tax years to the current tax year. This rule can be used to make occasional top-ups to pension savings without having to pay an extra AA charge.

Videos and more information about tax and your pension

You can learn more about the Annual and Lifetime Allowances in the Read as You Need guides.

You can also watch series of short videos on tax below or watch these videos in the video library.

Understanding the Annual Allowance (AA)

Understanding the Tapered Annual Allowance (TAA)

Understanding the Money Purchase Annual Allowance (MPAA)

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Each of Railpen Limited (registered in England and Wales No. 2315380) and Railway Pension Investments Limited (RPIL) (Registered in England and Wales No. 1491097) is a wholly owned subsidiary of Railways Pension Trustee Company Limited (Registered in England and Wales No. 2934539). Registered office for each company: 100 Liverpool Street, London EC2M 2AT. RPIL is authorised and regulated by the Financial Conduct Authority for some of its activities. The administration of occupational pension schemes is not a regulated activity. Full details about the extent of RPIL's authorisation and regulation by the Financial Conduct Authority are available from us on request.