The Annual Allowance is the limit of savings that can be accumulated from one’s pension payouts in a calendar year as per the taxation timeline. Annual Allowance is often shortened into the initials - AA (the initials).
It is an allowance against tax that is calculated each year, such as the annual depreciation of assets. It is the amount an individual’s pension is allowed to increase before taxes.
When the AA is exceeded after the carry forward time is exhausted, the pension becomes taxable and that’s why most people would love to keep a close eye on their carry forward and annual allowance limit.
People with a high salary which would normally be someone who earns more than £175,000 in a tax year will have their annual allowance tempered at a fixed rate.
For example, in the UK, the annual allowance is currently set at GBP £40,000 for most employed people. If someone’s pension savings go higher than £40,000 in a tax year, there will be a tax charge to be paid.
Use of the Term in Sentences
- Calculating annual allowance and constantly checking if it is taxable is a tough job and people usually opt for income tax consultants.
- People with higher income must keep track of their tempered annual allowance or the surprise at the end of the month will not be pretty.