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11 April 2023

Tax relief and tax allowances explained

With the start of the new financial year on 6 April and the announcements made as part of the Spring Budget on 15 March, it seems timely to give members of the Amey OS Pension Scheme a bit of a re-fresher on the fundamentals. From tax relief – to all of the tax allowances that apply in different situations and making the most of them all – we have it all covered in the next few lines.

Tax relief on your pension – what is it?

When you save for retirement via a pension, some of the money that would normally have gone to the government in tax from your wages, goes towards your pension instead. This is known as tax relief. It increases your savings and can be a substantial amount if it’s saved over many years.

Here’s an example. If you’re a basic-rate taxpayer and want to save £100 into your pension, because of the way tax relief works it will actually only cost you £80. The other £20 comes from the tax relief.


There’s a limit to how much tax relief you can get

While you can put as much money as you want into your pension, there are limits on the amount of pension savings that can benefit from tax relief each year and over your lifetime. These amounts are set by the government and may vary at the start of each financial year in April.

A few major pension-related changes were announced on 15 March when Chancellor of the Exchequer Jeremy Hunt presented his Spring Budget.

The main headlines were changes to the amount of tax-free savings members can make each year (the ‘Annual Allowance’) and over their lifetime (the ‘Lifetime Allowance’).


Limits and tax allowances that could affect Amey members

Find below a breakdown of the tax allowances that apply to pension savers and further information on the changes that were introduced to them in the Spring Budget.

The main tax allowance affecting members of the Amey OS Pension Scheme who are in a defined benefit (DB) arrangement is the Annual Allowance, but there are other allowances that could apply too.


Annual Allowance

The Annual Allowance (AA) is the limit on your pension savings in a single tax year before you need to pay a tax charge. For the year 2023/2024, this limit is either 100% of your annual earnings, or £60,000 (previously £40,000), whichever is lower.

If you want to consider whether your pension savings will exceed the Annual Allowance, you need to understand how increases in your pension savings are worked out. It’s not as simple as just knowing how much you’ve paid in. More information on the AA is available on the Money Helper website.

If you pay Additional Voluntary Contributions (AVC), these also count towards your Annual Allowance. However, they are considered on a slightly different basis because they are classed as defined contribution (DC) arrangements.


Money Purchase Annual Allowance

The Money Purchase Annual Allowance is a limit on the amount of tax-free pension savings you can make into a defined contribution (DC) pension arrangement. It would only affect you if you take savings from a defined contribution arrangement (which includes Additional Voluntary Contributions) in certain ways.

If you have a DB pension but you pay AVCs and you start taking money from your AVCs, the amount you can continue paying into your pension and still get tax relief may reduce. This is because AVCs are classed as DC not DB, because they get invested in.

This is known as the Money Purchase Allowance (MPAA). The MPAA is set at £10,000 (used to be £4,000) from 6 April 2023.

You can check if you’ve gone above the MPAA using a simple tool on the government’s website.  

More information on the MPAA is available on the Money Helper website.


Tapered Annual Allowance

The Tapered Annual Allowance (TAA) generally applies to those on the highest incomes. This allowance gradually reduces the amount you can save into your pension plan annually depending on your income.  It may affect you if your income is over £260,000 (previously £240,000) from 6 April 2023.


Lifetime Allowance

The Lifetime Allowance (LTA) is the limit on the total amount of pension savings you can make in your lifetime without having to pay tax when you come to claim them. If your savings have exceeded the limit, you’d need to pay a tax charge on any amount over the allowance. The LTA limit has been frozen at £1,073,100 and it was announced 2 years ago that it won’t be changed until 2026.

It was, however, announced last month that the LTA will be abolished completely from 6 April 2023. This means that no one will face a LTA tax charge with the start of the new financial year.

As a result of the abolition of the LTA, the maximum amount most members can take as a lump sum will be frozen at £268,275, which is 25% of the current standard lifetime allowance of £1,073,100. However, members with a protected right to a higher lump sum on 5 April 2023 will continue to be able to access this right.


Making the most of your allowances

With the challenging financial times we are all facing, making the most of your tax limits may not be a priority at the moment. Everyone’s situation is different, though, and it’s always helpful to know your options in case spending a little more towards your pension seems like a logical step. To get the most out of your limits, you might want to consider paying in as much as you can before the tax year is up. This doesn’t necessarily mean paying in the full allowance but paying in as much as you are able to at the time.


Enhance your understanding of the topic of tax

You can find more details on tax relief and all tax limits and when they apply on  

For further information on pension tax relief, check out the Money Helper website or try the Which? pension tax relief calculator. It shows you how much tax relief you get based on your pension contributions.


We will be updating our website content and guides over the coming months to reflect the changes announced as part of the Spring Budget 2023, so please refer to this article or this news update in the meantime for the 2023-24 tax year figures.