Annual margin

Annual margin is the maximum amount you can put towards your pension each year with tax relief. This allows you to build up capital for additional pension and possibly benefit from tax relief. When filling in your tax return, you can deduct the amount you deposit to top up your pension from your taxable income.

The total amount you deposit will be paid out later in periodic payments. These payments will be taxed, but often at a lower rate because your income will probably drop when you retire. Find out more about your annual margin.

Yes, it’s possible that you’ll still have annual margin, even if you’re building up a pension through your employer. Annual margin is intended to top up any pension deficit you may have. Whether or not you have annual margin depends on the amount of pension you’re building up through your employer and the level of your income. If you still have annual margin and you expect your expenditure when you retire to be higher than your state and workplace pensions, it might be a good idea to set some money aside for your pension now and possibly benefit from tax relief.

Business owners are entitled to save and invest to top up their pension. The tax benefits can be as high as 49.5%. This tax relief is conditional on your deposits staying below a certain limit. This is how annual margin works for business owners. 

When filling in your tax return, you can deduct the amount you deposit to top up your pension from your taxable income. You’ll get 38% to 49.5% of your deposits back, if the total amount you deposit isn’t more than your annual margin and/or reserve margin. So always calculate your annual margin first. The capital you build up for your pension in your pension account won’t be subject to tax on income from savings and investments.

You will, however, pay income tax and social security contributions on the periodic payments you receive after retiring.

The amount you deposit into your pension account can’t be higher than your annual margin and/or reserve margin, as you won’t receive tax relief on any deposits above your annual margin. A pension account allows you to top up your pension for later, so you can’t withdraw the money or have it refunded in the meantime.

Once you reach state pension age, you can arrange to have the amount in your pension account paid out. You can do this sooner if you like, but the minimum term for the payments will be 20 years plus the number of years before you reach state pension age. Income tax and social security contributions will be deducted from these payments.

Tip: plan when you want your annuity to start paying out very carefully, as you may pay less tax on the payments after you reach state pension age.