Without doubt for some people, making pension contributions can be problematic. This especially true for those who:

  • Have large pension pots, and issues with the Lifetime Allowance (if applicable)
  • Want to make large contributions to a pension, and issues with the Annual Allowance
  • Have a large income, in excess of £200,000 and have a reduced annual allowance
  •  Make contributions to their pension as a basic rate taxpayer, and withdrawals as a higher rate tax payer

Lifetime allowance issues

The lifetime allowance is the maximum amount of pension savings you can accumulate over your lifetime while still enjoying tax benefits. As of now, the current lifetime allowance stands at £1,073,100. If your pension savings exceed this limit, you may be subject to a tax charge on the excess amount.

Here are some key points about the lifetime allowance:

  • Before 6 April 2023: If you took your pension before this date, the tax rate is:

    • 55% if you receive it as a lump sum.
    • 25% if you receive it through other means, such as regular pension payments or cash withdrawals.


  • On or after 6 April 2023: There is no lifetime allowance charge. Instead, you’ll pay Income Tax on some or all of the lump sum. Your pension provider will deduct the charge before you receive your payment.
The maximum tax free lump sum you can take from a pension, remains capped at 25% of the lifetime allowance, which would be £268,275. 

Whether the removal of the lifetime allowance stays, or could be reintroduced may depend on future governments policies.

Annual Allowance Issues

For most people it is possible to pay up to £60,000 per year into a pension, and qualify for tax relief (provided you earn more than that). 

But if you have income over £200,000 then it is possible that the amount you can pay into a pension is reduced.  If you have income in excess of £200,000 (the threshold income) then a test applies to see if you can pay in as much as £60,000 per year. This test is to assess the adjusted income. The adjusted income includes most income, and any pension contributions too. 

If you had a £260,000 per year, then the pension annual allowance would be reduced by £10,000. 

This is because it is reduced by £1 for every £2 over the £240,000. The annual allowance cannot be reduced to less than £10,000. 

In short anyone who meets the threshold income of £200,000, and has combined income and pension contributions between £240,000 and £312,000 or more, will have a reduced amount they can pay into a pension, somewhere between £10,000 and just under £60,000. 

So, for high earners paying into a pension can be problematic, even if they don’t have a large pension fund. Again, a VCT can be used to supplement pension provision in these circumstances too. 

 With a VCT you can:
  • Contribute up to £200,000 per year
  • Get income tax relief of 30% (£3,000 off of income tax for every £10,000 invested)
  • No lifetime maximum on the amount held
  • The money out completely tax-free after five years
Find out more about using a VCT to fund retirement, or call one of our advisers on 01793 686393 to find out more

Paying more in tax with a pension

It is possible that by paying into a pension may result in you paying more in tax than you save. 

If you are a 20%, basic rate tax payer when you make a pension contribution of £10,000 you will receive tax relief of £2,000. 

When you come to retire and take £10,000 out of your pension, if you are then a higher rate tax payer, – the first £2,500 is taken out tax free, then the remaining £7,500 is taxed at 40%. 

This means you would owe £3,000 in tax – which is £1,000 more than your initial saving! 

Find out more about how pension contributions could save (or cost) you more tax.

If you have a question about reducing your tax or want advice,  or just want to have a chat about it with a UK Qualified Independent Financial Adviser, then  phone now on 01793 686393 or contact us online.