Building a robust pension pot is a vital part of people’s financial health, but putting too much away could lead to Britons being hit with tax charges. People may be at risk of being caught out by the annual allowance.
What is the annual allowance?
The pensions annual allowance restricts the amount of money Britons can save towards their pension without being taxed.
For the 2021/22 tax year, the cap is set at £40,000.
It is possible to save more than this in a given year, but any amounts above the limit will no longer be free from tax charges.
It was raised to £225,000 for the 2007/08 tax year and again to £235,000 the following year.
Two more increases followed, taking the annual allowance to £245,000 and £255,000 in 2009/10 and 2010/11 respectively.
The latter level represents the highest annual allowance limit in its history.
In the following year, however, the allowance was slashed down all the way to £50,000.
However, as the name indicates, this limit applies to someone’s entire life, not just one year.
The lifetime allowance is currently set at £1,073,100, where it will be frozen until at least April 2026.
As with the annual allowance, breaches of the lifetime allowance must be reported on a tax return.
The penalties for exceeding the annual allowance or lifetime allowance can be harsh, so it is vital Britons ensure they know if they are on course to breach the limits.
Although they may seem like large amounts of money, many people who may not think of themselves as massively wealthy could find themselves close to the cap.