Everything you need to know about Annual Allowance

Annual allowance is an important concept for anyone who wants to get the most out of their pension accrual. It offers the possibility to receive tax benefits on the amounts you set aside for later. In this article you will learn everything about annual allowance, how to calculate it and why it is so important for your financial future.

What is Annual Allowance?

Annual allowance is the maximum amount you can deposit tax-free into your pension plan in a year. This maximum amount is determined by your income from the previous year. If you have accrued less pension - below the maximum amount - you can use this space to supplement your pension. 

Why is annual allowance important to me?

Annual allowance is important because it helps you build your pension, and you even get some tax benefits for it. By using your annual allowance, you can reduce the amount of tax you pay. As a result, your pension pot grows and you ensure a comfortable retirement, without paying unnecessary taxes. It is good to know that as soon as your pension pot is converted into a pension benefit, you will still pay tax. However, this is lower than the tax you would pay now. 

How do I calculate my annual allowance?

Calculating your annual allowance can be complex, but fortunately there are tools and calculators available to help you with this. These offer handy calculation aids to calculate your annual allowance. But of course you can also do it yourself. 

Steps to calculate your annual allowance:

Example 1: Calculate annual allowance 

Suppose your income in 2024 is €50,000 and your pension accrual was €0. The annual allowance is calculated as follows:

1. Calculate your gross income: Collect your annual statements or profit figures if you are an entrepreneur. For easy calculation, let's say your income is €50,000.
2. Look up the AOW franchise for this year: This is the amount on which you are not allowed to accrue pension, in 2024 this is €17,545. The reason for this is that this is already included in your AOW, so it is already well arranged by the government. We call the outcome 'the basis.'
3. Then view the maximum pension accrual according to the tax authorities: You can find this on the tax authorities website (which you can find here). In 2024, this is 30% of your gross income. 
4. (Optional) Find your factor A now: You can find this on your Uniform Pension Overview (UPO). The UPO is the annual overview that you receive from your pension fund.
   
   In this calculation, you are not accruing any pension, so we are calculating with €0. 

Please note, you only have this, of course, if you are already with a pension fund - for example, if you fall under a collective pension fund. Then you are already building up and may no longer have annual allowance. 

5. Any annuity contributions: If you have already made annuity contributions somewhere, for example at Vive, you must deduct this in the formula. We set this to €0 for now, because we assume that you are not building up any extra pension.
   
   
6. Calculate your annual allowance now: Use the following formula for this,
   ((Gross income − AOW franchise) × Maximum pension accrual (%)) − (6.27 × Factor A) − any annuity contributions 

Example: 

Your income is €50,000 and your factor A is €0. 

The calculation is then: ((€50,000 −€17,545) × 30%) − (6.27 × €0) - €0 = €9,586.50

7. Pay attention to the following points:
   Maximum annual allowance for 2024 is set at €36,077
   Maximum income over which you may calculate annual allowance is €137,800

Example 2: Optimally using your annual allowance 

You have the option to use your annual allowance from previous years - provided you have not yet fully used it. This is also called reservation space. This allows you to catch up on the unused annual allowance from the past ten years. Use the catch-up space (also called reservation space) for this. The maximum reservation space in 2024 (catching up to 10 years) is €41,608.

You can look up your catch-up margin (reserve margin) here.

Advantages of utilizing annual allowance

• Tax advantage: You pay less tax on your contribution, so you have more money left over for later (of course, you have to file a tax return for this).
• Higher pension accrual: You build up more quickly because there is more in the pot (money makes money), so you have more money available when you retire.
• Flexibility: Decide for yourself how much and when you contribute. 

Tips for maximizing your annual allowance

1. Start calculating and planning early.
2. Use online tools and calculators. You can use our calculator for this, or view the government's here: Calculate your deductible annuity contribution (from 2016) (belastingdienst.nl)
3. Consult a financial advisor for personal advice. That is always best if you can't figure it out yourself. 

Conclusion

Annual allowance is a powerful tool to improve your pension accrual. By making smart use of the options offered by the tax authorities, you can ensure a financially worry-free retirement. Take the time to calculate your annual allowance and plan your financial future today!