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Pension tax limits

A simple summary of tax allowances and how they could affect your pension savings.

Tax and your pension

Tax and tax allowances on your pension savings can be complicated. It’s important to know the basics, so you understand how this might affect your pension and how you save for the future.

Here’s a simple explanation of the main pension tax allowances you should know about, and a brief summary of how they could affect you and your pension savings.

Increasing your pension savings with tax relief

The great advantage of saving for retirement in a pension, is that some of the money that would normally have gone to the government in tax, goes towards your pension instead. That way, it makes your pension contributions cheaper.

You can put as much money as you want into your pension, but there are limits on the amount of pension savings that can benefit from tax relief each year before you have to pay tax. You can read more about these limits under tax allowances below.

Video: Understanding tax relief

Watch this short video to learn more about tax relief. 

Tax allowances affecting pension savings

  • The main tax allowance which could affect you is likely to be the Annual Allowance (AA).
  • The Tapered Annual Allowance (TAA), may also apply to high earners.
  • The Money Purchase Annual Allowance (MPAA) is only triggered if you start to take money from a defined contribution (DC) pension pot in a flexible way such as using drawdown. You should notify Railpen if you trigger the MPAA in another scheme.
  • The 3 Lump Sum Allowances – the Lump Sum Allowance, The Lump Sum and Death Benefits Allowance and the Overseas Transfer Allowance - replaced the Lifetime Allowance from 6 April 2024.

Current tax allowances

Annual Allowance

The AA is the limit on your pension savings that can benefit from tax relief each year. It isn't based on the contributions you make towards your pension, but on the value of your pension savings each year. The most you can save tax-free towards all your pension arrangements in a single tax year, is the lower of either 100% of your earnings, or the amount the AA is set at for that tax year. The AA for 2025/26 is £60,000. 

Tapered Annual Allowance

The TAA is a lower Annual Allowance and may affect you if your taxable income is over £200,000.

Money Purchase Annual Allowance

The MPAA is currently set at £10,000 and may be measured against any DC contributions you make.

Lump Sum Allowances

There are three new allowances and they limit the total amount of tax-free lump sums people can get from pension savings.. They're called:

The Lump Sum Allowance

The Lump Sum Allowance (LSA) is a cap on the amount of tax-free lump sum you can receive from all of your pension arrangements. Lump sums paid under this allowance are called Pension Commencement Lump Sums (PCLS) and are usually:

  • up to 25% of the value of the pension savings for DB members, or
  • up to 25% of the value of your pension pot at retirement for DC members

The most you can take as a tax-free lump sum from all your pension arrangements is £268,275, unless you hold a valid Lifetime Allowance protection, in which case it will be 25% of the value of the protected amount.

The Lump Sum and Death Benefits Allowance (LSDBA)

This is the cap on the tax-free lump sum that can be paid to, or in respect of, a member of a pension scheme. If the value of lump sum death benefits means that the LSDBA will be exceeded, the excess will be taxed at the marginal rate of income tax of the person receiving it.

The standard LSDBA is £1,073,100. But if you hold a valid Lifetime Allowance protection, it will be the value of the protected amount.

Overseas Transfer Allowance (OTA)

OTA limits the maximum tax-free amount that can be transferred out of the UK and only applies to transfers out to a Qualifying Recognised Overseas Transfer Scheme.

The OTA limit is £1,073,100, unless you hold a valid Lifetime Allowance protection. If the transfer value exceeds the OTA, there will be an overseas transfer charge (OTC) of 25%.

Going over the Annual Allowance

If your pension savings in the Fund are greater than the AA, or the MPAA applies and you exceed it, then we will send you a Pension Savings Statement (PSS) that will detail how much of the AA you have used.

You can apply to carry forward any AA that you haven’t used from the previous 3 tax years to the current tax year. This rule can be used to make occasional top-ups to pension savings without having to pay an extra AA charge.

 

For more information on pension tax allowances, visit the government's website.

Videos and more information about tax and your pension

You can learn more about the Annual and Lifetime Allowances in the Read as You Need guides.

You can also watch series of short videos on tax in the video library.

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