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Pension Tax

Pensions are a great way to save for retirement. Remember the 3 rules of pensions -

  1. There is no tax on money paid into pensions
  2. There is no tax on pension growth
  3. There is Income Tax to pay on pension income

Inheritance tax planning

Pensions can be a very useful inheritance tax planning tool because if you die before 75 the amount in your pension can be passed on tax free as a lump sum or income to a nominee, or, if you die after 75, pension income will be subject to income tax at the nominee’s marginal tax rate. (Defined Benefit pensions don’t offer this, they offer benefits such as 50% spousal pension). Note: make sure you fill out your nominated beneficiary pension form as not doing so might restrict the options for your beneficiaries/potential beneficiaries.

The nominee can then pass on their pension to their beneficiaries, so there can be a cascading of wealth through the generations.

Pensions are outside individual’s estate when it comes to inheritance tax, so, you could have £1,055,000 (or more with transitional protection) above the lifetime allowance passed onto beneficiaries that is not subject to any form of tax.

Annual Allowance Excess Tax Charge

You are allowed to contribute £40,000 per year into your pension as long as you have the equivalent pensionable earnings. You can contribute more if you have available carry forward from the 3 preceding input years. If you have triggered the MPAA you can only put in £4,000 into a money purchase pension.

If you pay in too much you will be taxed at your marginal rate on this excess amount.

If you have an income (including employer pension contributions) of more than £150,000 your annual allowance is reduced by £1 for every £2 over this amount.

You can only contribute a maximum of £1,073,100 into your pension during your lifetime. This amount will probably change in the future. If you go over this amount you will have a charge of 55% on lump sums and 25% on income (Lifetime Allowance Tax Charge).


You don’t pay tax on contributions, but, understand that it is preferable to pay in contributions through your employer as they are not charged National Insurance and Income Tax on pension contributions. Personal contributions are subject to Income Tax and National Insurance before the Tax Relief is given (so you don’t get as much money going into your pension). You also have to remember to claim money back on yourself assessment tax return if you are a higher or additional rate tax payer and lots of people forget to do this!

For more information regarding Pension Tax contact Cambridge Pensions.