Money Purchase Annual Allowance (MPAA) – watch out for the pension tax trap!

Money Purchase Annual Allowance (MPAA)

When you are deciding what pension contributions to make in any tax year you will also need to take into account whether you have accessed any of your pension savings in that year or in an earlier tax year. This restriction is imposed by the money purchase annual allowance (MPAA), which was was increased back to £10,000 in the 2022 Autumn Statement from £4,000 after being originally decreased from £10,000 back in 2017.

If you have flexibly accessed your pension benefits from a money purchase pension scheme, SIPP or SASS, your pension contributions will need to be restricted from the date you accessed them (the trigger date).

The MPAA restriction does not apply if your pension benefits are taken as:

• A small pots lump sum
• A pension commencement tax free lump sum (BUT ONLY WHERE NO PENSION INCOME IS TAKEN AS WELL) or
• The income comes from a capped draw-down arrangement.

Where the MPAA restriction does apply, any contributions paid into a money purchase scheme after the trigger date are checked against the MPAA.

Where those contributions exceed the MPAA, a tax charge will be due.

HMRC has recently set up an online tool to help you clarify whether the MPAA tax charge applies but the accompanying explanation is not easy to follow.

Our pension tax experts can help you clarify whether you may be liable to pay a pensions tax charge in respect of contributions paid in previous tax years.

Even if you are not caught by the Money Purchase Annual Allowance (MPAA), if you are a higher earner you will also need to take the tapered annual allowance into account which will also limit the amount you can pay into your pension. You can read more about that here.

Find out more with THP Chartered Accountants

For further details pension contributions and MPAA restrictions, contact THP Chartered Accountants with offices in  Sutton, Chelmsford, Wanstead, and Saffron Walden.