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Tax relief on pension contributions is available on contributions up to the annual allowance. To the extent it is unused the annual allowance can be carried forward for up to three years.

The annual allowance is £50,000 for 2012/13 and 2013/14 and £40,000 for 2014/15. As a result of changes to align the pension input period (the period over which pension contributions are tested against the annual allowance) with the tax year from 2016/17 onwards, for 2015/16 only, the annual allowance is £80,000, but this is subject to an allowance of £40,000 only for the period from 9 July 2015 to 5 April 2016. The 2015/16 tax year is split into two periods – 6 April 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016, each with their own allowance of £40,000.

Pension contributions can also be used as a planning tool, for example to reduce income and preserve entitlement to the personal allowance for those with income in excess of £100,000.

High earners with income in excess of £150,000 may wish to make the most of available allowances in 2015/16 as from 2016/17 the annual allowance will be tapered.

Example:
Paul is an additional rate taxpayer. He makes contributions into his pension scheme up to the level of the annual allowance each year to take advantage of the tax relief available.

In 2015/16 he makes a contribution of £40,000. He pays it net of basic rate tax, making a payment of £32,000 and receiving tax relief of £8,000 at source.

As he is an additional rate taxpayer, he claims further tax relief of £10,000 via his self-assessment tax return (being the difference between additional rate relief of 45% on the contribution of £40,000 and the basic rate relief of 20% given at source). In total, he receives tax relief of £18,000 and the contribution to his pension scheme of £40,000 only costs him £22,000.

Assuming Paul’s income remains above £150,000, he will not able to make a tax-relieved contribution of £40,000 in 2016/17 as his annual allowance will be reduced.