The maximum pension is a cap on the pension contributions you can make. While you receive tax relief from the government for most pension contributions, if these contributions exceed the maximum annual pension contribution of £40,000, you might receive a hefty tax bill. 

Though only a few people will be affected by the maximum pension contribution, it’s still important to keep in mind, especially if you contribute a large percentage of your earnings each month, and doubly so if your employer matches your contributions. On this page, you’ll learn what the maximum pension is, what happens if you exceed the annual pension contribution allowance and how much you should be putting into your pension.

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The rundown
  • While there’s no limit on how much you can contribute into your pension pot, exceeding the maximum limit will affect your tax relief
  • The annual pension contribution allowance and the maximum amount you can pay into your pension pot and receive tax relief for is £40,000
  • If you’re under 75, you’ll be eligible to contribute up to 100% of your taxable earnings, or £3,600 gross earnings into your pension, and still receive tax relief on your contributions

What is the maximum pension?

There’s no limit on the maximum amount you can contribute into your pension pot in the UK. However, while you can pay in as much as you like, there is a limit on how much tax relief you’ll receive from the government. 

The annual pension allowance of £40,000 is the maximum amount you can pay into your pension every year and still get tax relief. It makes no difference how you do this. For example, you could make regular, lump sum, or employer contributions towards your pension allowance. The maximum pension limit applies to all contributions paid into your pension

This annual allowance also applies if you’re paying into more than one pension scheme. That means your personal contributions, employer contributions, tax relief and other pension plans all count towards your total annual pension allowance of £40,000. 

What’s the maximum amount I contribute to my pension?

If you’re under 75 years of age, you’re eligible to contribute up to 100% of your UK taxable earnings, or £3,600 gross earnings, and still receive tax relief on your contributions. That said, the exact value of tax relief you’ll receive depends on your circumstances. 

If you earn less than £3,600 per annum, you’ll still be able to receive tax relief on your contributions as long as they don’t exceed this amount. On top of this, you can continue benefiting from employer pension contributions. These will also count towards your maximum pension limit, meaning that the total of your employer contributions, personal contributions and HMRC top-ups can’t exceed £40,000 per year

Who does the maximum pension apply to?

Every working individual in the UK who has a workplace pension or personal pension is subject to the maximum pension allowance. The cap on tax relief limits depends on your annual pension allowance and Lifetime Allowance (LTA).

Your Lifetime Allowance is the total amount you can have in all your pensions throughout your lifetime without incurring any tax. Both the LTA and the annual allowance apply to pensions; one doesn’t replace the other. 

The Lifetime Allowance for the 2020/21 tax year is £1,073,100. All your pensions will be measured by this allowance limit when you take money from your pension or turn 75. If you’ve already built a large pension pot in one or more pension schemes, you may want to consider registering for pension protection with HMRC, so you don’t get caught in any other restrictions or changes in tax rules. 

What is the tax-free contributions limit?

To receive tax relief on your contributions, you may only contribute as much as you earn in each tax year. Alternatively, you can also pay up to £3,600 into your pension, whichever amount is greater for you. 

For example, if your current tax year salary is £25,000, then £25,000 is the most you can contribute to all your pension schemes and still receive tax relief. However, if you work on a part-time or more transient basis, and £3,600 is greater than or equal to your annual income, then £3,600 is the most you can pay into your pension each year.

What happens if you exceed the pension contribution limit?

If you exceed the UK pension contribution limit, you won’t receive tax relief on contributions exceeding the limit. Put simply, if you contribute more than £40,000 in one year, you’ll pay tax on any additional contribution. If you withdraw this money as income, you’ll pay tax at 25%. If you withdraw it as a lump sum, your tax bill becomes somewhat heftier at 55%.   

Contributing more than the annual pension allowance could result in exceeding the pension contribution limit and facing an annual allowance charge, adding to your taxable income for each tax year. If your annual allowance charge reaches more than £2,000, you can ask your pension scheme to pay the charge directly from your benefits, but you’ll reduce your pension scheme benefits by doing so. 

How much should I contribute?

Determining how much you should contribute to your pension depends on your circumstances. Pension tax rules are always subject to change, but if you’re looking to retire at 65 with a comfortable income, it’s important to save as much as you can afford.

The best way to approach this is to think about the percentage of your income (before tax) that you could contribute into your pension without affecting your lifestyle. You could start by contributing a small percentage and then gradually increase that percentage as and when you can. You can always change the amount you contribute to your pension pot, depending on your career development or earnings.

Is there another way to earn more income in retirement without affecting the maximum pension?

If you’re lucky enough to be able to save more than the maximum annual pension contribution, there are a few other ways of saving for retirement that you might want to consider.

Investing in the stock market might be an option. While investing comes with risks that can lead to losing some or all of your investment value, it can also come with high rewards. However, if you’re uncomfortable with risk, it may be better to consider other options. 

You could consider opening an individual savings account (ISA). ISAs are a more secure way of saving your money than investing, but there’s a limit of £20,000 per year on how much you can save

One of the safest ways to save for retirement is by opening a savings account that offers a competitive interest rate. You won’t risk losing your savings, as the Financial Services Compensation Scheme (FSCS) protects deposits into savings accounts offered by UK-regulated banks. 

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