The Annual Allowance sets the limit of tax-relieved pension savings at £40,000 a year. This is the limit that will apply to most people. If your total pension contributions in a year are higher than £40,000 (including any contributions paid by your employer or anyone else), you will have to pay a tax charge on the excess, based on your marginal rate of tax. The Annual Allowance is not scheme-specific and applies across all the pension arrangements you may have. If you have benefits in a defined benefit scheme (eg, an old employer’s scheme where you have a deferred pension), the increase in value of this pension through its annual increases is also taken into account.

Unless you have a Money Purchase Annual Allowance (MPAA – see below), you may be able to bring forward any unused Annual Allowance from the previous three tax years, to either reduce your Annual Allowance charge to a lower amount or reduce the Annual Allowance charge completely.

If you take some of your pension savings using the pension flexibilities introduced in April 2015 (eg, by taking a taxed lump sum or flexi-access drawdown), but you’re still paying contributions into your pension, then you will be limited by Money Purchase Annual Allowance (MPAA). The MPAA was £10,000 when it was introduced in April 2015 but it has been reduced to £4,000 a year, from April 2017. If the MPAA applies to you, and you exceed it, you will have to pay a tax charge on the excess, based on your marginal rate of tax. However, unlike the normal AA, you cannot carry forward unused MPAA from previous years to offset the charge.

Finally, there is another Annual Allowance that applies to very high earners, called the Tapered Annual Allowance (TAA). If your threshold income is above £110,000, the standard Annual Allowance is reduced by £1 for every £2 your adjusted income goes over £150,000, down to a minimum Annual Allowance of £10,000.

Threshold income includes your total taxable income, including, for example, the money you earn from your job, any benefits you get from your job, profits you make from investments, rental income and most pension income. If your threshold income for the tax year is £110,000 or less, then you will keep the standard Annual Allowance of £40,000.

If your threshold income is over £110,000, then the level of your adjusted income will determine what your Annual Allowance is. Adjusted income is your threshold income plus the total amount of your and your employer’s pension contributions over the tax year. If you have a defined benefit pension, you would also need to include the increase in value of this pension over the year, and remember to consider all the pension schemes you belong to, not just your Caterpillar pension/s.

To find out more about pensions tax allowances, go to: www.gov.uk/tax-on-your-private-pension

For more specific guidance on the Tapered Annual Allowance, go to: www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance