HMRC Rules & Limits

Despite being 'simplified' in 2006 by part 4 of the Finance Act 2004, the tax rules surrounding registered pension schemes remains complex, as evidenced by the hundreds of pages that comprise HMRC's Registered Pension Scheme Manual ( Indeed successive governments have continued to make changes to the tax reliefs available.

Pensions are tax efficient in that contributions are tax relievable either through personal tax relief in respect of individual contributions or eligible as a business expense in the case of employer contributions, plus once invested funds grow tax efficiently (generally no income or capital gains tax). Not surprisingly limits apply to what can be contributed and accumulated within a pension fund. These limits apply equally to a SIPP or SSAS.

Contributions and annual allowance 

For the current tax year 2013/14 the level of contributions on which personal tax relief will be granted is up to 100% of UK earnings (from employment or self employment) subject to an overall limit of £50,000, known as the annual allowance. Employer contributions are also subject to the annual allowance. Accordingly it is the combination of personal and employer contributions that is measured against the annual allowance. Contributions in excess of the annual allowance are subject to a tax charge levied on the scheme member at their highest marginal rate.

It is however possible to ‘carry forward’ any unused annual allowance from the previous three tax years provided that the individual was a member of a registered pension scheme in those years. The allowance figure used is £50,000 per tax year. The total gross personal contributions must not be more than the UK earnings in the current tax year. 

The annual allowance is currently scheduled to be reduced to £40,000 for the 2014/15 tax year and going forward.

Lifetime allowance

There is also a limit on the amount of pension benefits that accrue - this is known as the lifetime allowance and was reduced to £1.5 million from £1.8 million with effect from 6 April 2012. The current plan is for this to reduce further to £1.25 million with effect from 6 April 2014. The standard lifetime allowance for a specific individual can be enhanced for various reasons including pension credit transfers, certain overseas transfers and primary protection claimed when the Finance Act 2004 came into force on 6 April 2006 giving a personal lifetime allowance of more than the standard lifetime allowance. Following the reduction effective from 6 April 2012 individuals could claim fixed protection to retain a lifetime allowance of £1.8 million. 

Unless enhanced protection against the lifetime limit was successfully applied for by 5 April 2009 and has been retained, any pension funds in excess of the personal lifetime allowance or if more the fixed protection amount are subject to an additional tax charge. For enhanced or fixed protection to be retained no further tax relievable contributions (personal of employer) must be made to registered pension schemes.

Pension benefits are 'tested' against the lifetime allowance mainly (but not always) when they come into payment - this is known as a 'benefit crystallization event' (BCE). Examples of BCEs include taking benefits other than ongoing income drawdown payments, attaining age 75 and transferring to an overseas pension arrangement.

Benefits payable

The main benefits payable on retirement from age 55 and older are:


  • tax free lump sum of up to 25% of the value of the pension fund (capped at the lifetime allowance, subject to any enhancement or protection);
  • lump sum taxed at 55% of the amount in excess of the lifetime allowance, subject to any enhancement or protection
  • annual taxed capped drawdown income of 120% of GAD amount for reference years commencing from 26 March 2013 (those commencing prior to 26 March 2013 the maximum was 100% of GAD amount), which must be reset at least every three years until age 75 after which it is annually.

It is possible to take more than the GAD amount as taxed income under flexible drawdown. To do this no further pension contributions can be made and a minimum guaranteed income currently of £20,000 from certain other pension arrangements is required.  These include state pension, most annuities, most defined benefit occupational pensions and certain scheme pensions.


In addition to the above the following benefits arise on death:


  • 100% of the fund, subject to any applicable lifetime allowance, on death before 75 where no benefits have been taken, one or more dependent's pensions or a combination of both;
  • where benefits have been taken or after age 75 a lump sum taxed at 55%, one or more dependent's pensions or a combination of both.

Alternatively some or all can be paid to a registered charity without any tax being payable.