The amount you save into your pension pot can benefit from tax relief, as long as that amount doesn’t exceed the annual allowance in any tax year. If your taxable earnings in the year are below the annual allowance, then you can receive tax relief on 100% of your earnings (up to the annual allowance) or £3,600 gross –  whichever is higher.

The annual allowance limit for the current tax year is £60,000. This limit includes all your contributions, tax relief and employer contributions across all your pension arrangements. It doesn’t include your State Pension. Contributions over this limit will result in a tax charge, known as the annual allowance charge.

If you have an income of over £260,000 in a tax year, then your annual allowance for that tax year will reduce on a tapered basis. For every £2 of adjusted income above £260,000, your annual allowance will reduce by £1. The maximum reduction is £50,000 so anyone with an income of £360,000 or more will have an annual allowance of £10,000.

The rules around the tapered annual allowance are complex and only a brief summary is provided here. Further information is available on HM Revenue & Customs website at: www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm057100

If you take flexible lump sums from your pension savings or start taking an income from flexi-access drawdown, you’ll be subject to a reduced money purchase annual allowance of £10,000 for future savings made into defined contribution pension schemes. Your pension provider will let you know if this applies to you. Within 91 days of this notification, you’ll have to tell any other pension providers you’re with that you’ve flexibly accessed your pension pot, and on what date you did so.

If you have to pay an annual allowance charge, you may be able to reduce the charge by using any leftover annual allowance from the 3 previous tax years – this is known as ‘carry forward’ (but this doesn’t apply to the money purchase annual allowance). You can also ask your pension provider to use some of your pension savings to pay the charge under the Scheme Pays rules.

You can use carry forward if you’re an active member currently building up pension benefits; a deferred member with paid-up pension benefits; a pensioner member, in receipt of pension benefits from your pension scheme, or a pension credit member, where you have a share of your ex-partner’s pension scheme. Carry forward may be particularly useful if you’re self-employed and your earnings change significantly each year, or if you’re looking to make large pension contributions.

To use carry forward, you must pay in more than the maximum contribution in the current tax year (£60,000 in the current tax year) and can then use unused annual allowances from the 3 previous tax years, starting with the tax year 3 years ago.

For the current tax year, the annual allowance comes down to £10,000 (compared with the full allowance of £60,000) – the MPAA – if you take money out of your pension pot as cash (in one go or as smaller lump sums). The MPAA doesn’t apply if you’ve only used some or all of your pension pot to buy a lifetime annuity, take your tax-free cash only or if you’re taking all your money out of your pot under the small pots rules. Once your annual allowance is reduced to £10,000, you won’t be able to carry forward any allowances from previous tax years.

Find out more about tax relief after you’ve taken pension money out

However, if the charge is more than £2,000 you can ask your pension scheme to pay the charge directly out of your pension pot.

If you have more than one pension scheme, the maximum you can ask The People’s Pension to pay would be the amount of your pension savings that went above the annual allowance in The People’s Pension only.

If your contributions with The People’s Pension in a tax year exceed the annual allowance, we must provide you with a pension savings statement by 6 October following the end of that tax year. This gives you information on the contributions you’ve made to the scheme in the relevant tax year and the previous 3 tax years. The pension savings statement helps you assess whether you’re liable to an annual allowance tax charge (after taking into account any carry forward). If you’re liable to the charge, you must inform HM Revenue & Customs.

You can elect for The People’s Pension to pay all or part of the annual allowance charge on your behalf by completing the Scheme Pays election notice – this is available on request. The election must be made by 31 July every year. If you make a Scheme Pays election, then the amount of the annual allowance charge (and any interest due) will be deducted from your personal account. The election is final which means it can’t be cancelled at a later date (although it may be amended by sending in a further notice within HM Revenue & Custom’s time limits).