Tax controls on pensions - annual allowance
HMRC (Her Majesty’s Revenue and Customs) places a limit on how much your pension savings can increase over the course of a year before having to pay a tax charge.
The annual allowance tax charge is in addition to any income tax you pay on your pension once it is in payment.
What the annual allowance is
The annual allowance is the amount your pension benefits can increase in a ‘pension input period’ without incurring a tax charge.
The limit is set by HMRC and applies to all of your pension savings including those outside of the LGPS. Any amount over the limit (excess) will be taxed as income.
What the Pension Input Period is
The ‘pension input period’ (PIP) is the period over which your pension growth is measured.
Until 2014 to 2015 the PIP in the LGPS ran from 1 April to 31 March. From 6 April 2016, PIPs for all pension schemes are aligned with the tax year: 6 April to 5 April. Special transitional arrangements applied for 2015 to 2016.
What the annual allowance limit is
The standard annual allowance limit has changed over the years and is reviewed annually by the government.
The standard annual allowance limit for most people is set out in the table below.
| Pension Input Period start | Pension Input period end | Standard annual allowance limit |
|---|---|---|
| 1 April 2011 | 31 March 2012 | £50,000 |
| 1 April 2012 | 31 March 2013 | £50,000 |
| 1 April 2013 | 31 March 2014 | £50,000 |
| 1 April 2014 | 31 March 2015 | £40,000 |
| 1 April 2015 | 5 April 2016 | £80,000 (transitional rules apply) |
| 6 April 2016 | 5 April 2017 | £40,000 |
| 6 April 2017 | 5 April 2018 | £40,000 |
| 6 April 2018 | 5 April 2019 | £40,000 |
| 6 April 2019 | 5 April 2020 | £40,000 |
| 6 April 2020 | 5 April 2021 | £40,000 |
| 6 April 2021 | 5 April 2022 | £40,000 |
| 6 April 2022 | 5 April 2023 | £40,000 |
| 6 April 2023 | 5 April 2024 | £60,000 |
| 6 April 2024 | 5 April 2025 | £60,000 |
If you are a high earner, your limit may be reduced
You may also have a different annual allowance limit if the Money Purchase Annual Allowance (MPAA) rules apply (see below).
How the increase on your LGPS benefits is calculated for the annual allowance
To check whether you have exceeded the annual allowance in a given PIP, we need to work out how much your pension has increased by.
To get the value of the increase, the value of your pension benefits at the start of the ‘pension input period’ is deducted from the value of your pension benefits at the end of the ‘pension input period’ (after the cost of living adjustment is applied). To work out the value of your LGPS pension benefits the formula is:
To work out the value of your LGPS pension benefits the formula is:
(Annual pension x 16)
+ Automatic lump sum if applicable
+ AVCs (Additional Voluntary Contributions) if applicable
You can use this to work out whether or not you have to pay a tax charge.
A tax charge may apply if the increase on your LGPS pension benefits is more than the annual allowance limit either:
- on its own
- when added together with the increase on any other pensions benefits you hold outside of the LGPS
Carry forward
A three-year ‘carry forward’ rule applies to the annual allowance (AA).
You can carry forward any unused allowance from the previous three years before the year in which the tax charge occurred. To do this, you must have be a member of a tax registered pension scheme in each of the three years. If you have enough carry forward left to accommodate the excess pension you won’t exceed the limit.
For example, if the value of your pension savings in 2021/2022 increased by £50,000, as the annual allowance limit was £40,000, the excess over the limit is £10,000.
In the previous year (2020/2021), pension savings had only increased by £20,000 and so had not exceeded the £40,000 limit. £20,000 could be carried forward which would be enough to offset the £10,000 excess in 2021/2022, meaning a tax charge would not apply for that year..
The person in this example only became a member of a registered pension scheme in the previous year.
However, if you were a member of a registered pension scheme in any of the three years before, it will be the carry forward from the earliest year that is used first to offset any excess.
Tapered annual allowance for high earners
From 6 April 2016, HMRC introduced the tapered annual allowance. This rule means that if your income is over a certain amount the annual allowance limit is reduced, or "tapered".
To determine if your annual allowance should be tapered, you should compare your ‘threshold income’ and your ‘adjusted income’ with the limits set out in the table below.
If you exceed these your annual allowance limit will be reduced. For every £2 that your adjusted income exceeds the limit, your annual allowance limit is reduced by £1.
| Income type | What this consists of | 2016/2017 to 2019/2020 | 2020/2021 to 2022/2023 | 2023/2024 to 2024/2025 |
|---|---|---|---|---|
| Threshold income | Broadly your taxable income after your pension contributions have been deducted (including AVCs deducted under the net pay arrangement) | £110,000 | £200,000 | £200,000 |
| Adjusted income | Broadly, your threshold income plus pension savings built up in the tax year | £150,000 | £240,000 | £260,000 |
Your annual allowance limit cannot be reduced by less than the minimum applicable annual allowance.
This was £10,000 from 2016/2017 to 2019/2020. From 2020/2021 to 2022/2023 it was £4,000.
From (2023/2024) up to the current tax year, it has been raised to £10,000.
For example, if your threshold income for 2021/2022 after pension contributions have been deducted is £201,000, you will have exceeded the threshold income limit.
The pension savings for the year was £42,000. We add this to the threshold income to get the adjusted income: £201,000 + £42,000 = £243,000. This in excess of the adjusted income limit and means the tapered annual allowance will apply.
We can work out the annual allowance after tapering by deducting the adjusted income and then dividing it by 2: £243,000 - £240,000 = £3,000 / 2 = £1,500.
This figure can then be deducted from the standard annual allowance: £40,000 - £1,500 = £38,500.
This will be the annual allowance limit.
More information about tapering can be found on the HMRC website.
Money Purchase Annual Allowance (MPPA)
The MPAA rules may apply if:
- you have benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015
- your total contributions to a money purchase arrangement in a pension input period exceed the MPAA limit.
Flexible access means:
- taking a cash amount over the tax-free lump sum from a flexi-access drawdown account
- taking an uncrystallised fund pension lump sum (UFPLS)
- purchasing a flexible annuity, taking a scheme pension from a defined contribution scheme with fewer than 12 pensioner members or
- taking a stand-alone lump sum if you have primary but not enhanced protection. A stand-alone lump sum is a lump sum relating to pre 6 April 2006 where the whole amount can be taken as a lump sum without a connected pension.
If you access flexible benefits, your pension scheme must give you a flexible access statement. You must provide us with a copy of this statement. If your pension contributions exceed the MPAA shown in the table below, your LGPS pension savings will be measured against the alternative annual allowance, also shown in the table.
| Tax year | Money Purchase Annual Allowance | Alternative Annual Allowance |
|---|---|---|
| 2016/2017 | £10,000 | £30,000 |
| 2017/2018 to 2022/2023 | £4,000 | £36,000 |
| 2023/2024 to 2024/2025 | £10,000 | £30,000 |
Will you be affected by the annual allowance?
Most people will not be affected by the annual allowance tax charge because either the value of their pension savings do not exceed the limit, or, where they do exceed, they have enough ‘carry forward’ to offset the excess. Your LGPS pension benefits are more likely to increase significantly if one of the following applies:
- you paid into your LGPS before 1 April 2014 or transferred in final salary pension benefits and you receive a significant pay increase
- you pay a high level of additional contributions
- you are a higher earner
- you transfer pension rights into the LGPS which have a significant increase on your pension
- you combine previous LGPS pension benefits that include final salary pension benefits built up before 1 April 2014
- you have accessed flexible benefits in a money purchase arrangement on or after 6 April 2015
Check if your LGPS pension savings are likely to exceed the annual allowance with the LGPS quick check tool.
Pension savings statements
If your LGPS pension savings exceed the standard annual allowance in a given pension input period or are close to exceeding, we will provide you with a pension savings statement by 6 October.
The pension savings statement will show your pension growth in respect of your Buckinghamshire LGPS pension as well as the previous 3 years so you can calculate any carry forward allowance.
If your pension growth doesn’t exceed the annual allowance limit, we can still provide you with a pension savings statement upon request. You must provide us with at least three months’ notice if you wish to request a statement from us.
We also inform you if you exceed the MPAA where we are aware it applies.
Completing a self-assessment tax return
If you exceed the annual allowance in a year, you must report this to HMRC in your self-assessment tax return. If you did not complete a self-assessment tax return last year, you will need to register first.
To complete this you will also need our Pension Scheme Tax reference number which is: 00328524RG.
We are unable to report this on your behalf. HMRC will advise you what the tax charge is. The tax charge is calculated as:
Your annual allowance excess (less any unused ‘carry forward’) x Your marginal rate of tax
If your tax charge is more than £2,000, we may be able to meet some or all of the tax charge on your behalf. The value of the tax charge would then be recovered from your LGPS pension.
For more information, see Using "scheme pays"
Slowing down your pension growth
If you wish to slow down your pension build up to reduce an annual allowance tax charge, you may wish to consider moving to the 50/50 section. In the 50/50 section of the LGPS you pay half your normal contributions and build up half your normal pension, while retaining full life cover and ill health cover.
More information is available here: Pay less into your pension
We always recommend you take independent financial advice before taking any action to reduce tax liabilities.