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Annual Allowance

What is the annual allowance?

The annual allowance is the maximum amount of tax-free growth an individual's pension savings can grow by in anyone year. If individuals exceed this limit they will need to pay an tax charge, the annual allowance charge, to HMRC. The annual allowance limit covers all your pension savings, except your State pension, so any other pension savings, e.g. AVC’s or a personal pension will need to be added to the value of your defined benefit occupational pension.

When was it changed?

From the 6 April 2011 the annual allowance reduced from £255,000 to £50,000 and again from 6 April 2014 to £40,000. From April 2016 higher earners will have their annual allowance tapered if their adjusted income is over £150,000.

The Government has introduced Tapered Annual Allowance from 6 April 2016 as a means to further reduce the Annual Allowance. It works by reducing a person’s Annual Allowance by £1 for every £2 of ‘adjusted income’ earned over £150,000, up to a maximum reduction of £30,000 leaving a minimum Tapered Annual Allowance of £10,000.


What is included in the Annual Allowance?

All contributions to money purchase schemes, defined contribution schemes, personal pensions and the growth in benefits for defined benefit schemes.

How is the Annual Allowance worked out for my final salary Scheme benefits?

In defined benefit schemes such as the NHS Pension Scheme and others the annual allowance is not based on the contributions that you pay into the Scheme. It is the growth in benefits from one year to the next taking into account inflation, which is measured using the Consumer Price Index (CPI). The growth in your benefits is measured over a "Pension Input Period"

What is a Pension Input Amount (PIA) in a defined benefits Pension Scheme?

This is the monetary amount your pension savings have grown by in the pension input period.

It is calculated by determining the difference between the value of your benefits at the start of the pension input period (the opening value) compared with the value at the end of the pension input period (the closing value).

What is the opening value in the defined benefits Pension Scheme?

This is the value of your benefits at the beginning of the pension input period converted into a capital value, which is increased by the CPI from the previous September

What is the closing value in the defined benefits Pension Scheme?

Is the value of the benefits at the end of the pension input period converted into a capital value

What is included in the Pension Input Amount?

The growth in your defined benefits Pension Scheme benefits including any doubled years, added years or additional pension being purchased.

Adjusted income (£150,000 and over) is the total of all sources of taxable income falling in the tax year plus the value of any pension saving in that year. This is to ensure that the restriction applies fairly and cannot be avoided, for example, through using salary sacrifice.

What is "carry forward"?

If you exceed the annual allowance in any one year you can "look back" up to three previous tax years to see if you have any unused allowance from these years. If you do, you may be able to "carry forward" any unused allowance and add this to your allowance in the current year. This means that if your pensions growth exceeds the annual allowance in any one year, say due to a promotion, you may not have any extra tax to pay, depending upon your personal circumstances.

The maximum amount that can be carried forward is £50,000 for each of the 3 previous tax years ending 31 March 2014 and £40,000 thereafter, and is calculated on the current annual allowance rules.

What happens if I exceed the annual allowance?

If you exceed the annual allowance will be taxed at your highest marginal rate on the amount over the annual allowance. So, if your "pension input amount" is £65,000, then £25,000 may be subject to tax. However, you may be able to use "carry forward" to reduce or eliminate your annual allowance charge.

How will I know if I have exceeded the annual allowance?

It is a member’s responsibility to ensure that any annual allowance tax charges are worked out, declared and paid in time. HM Revenue and Customs (HMRC) rules require that members who are over the Annual Allowance and who have tax to pay must do so via self assessment, or via a Scheme Pays process if they meet the criteria.

The HM Revenue and Customs self assessment process enables members to estimate any tax payable on their tax return. Members will then have 12 months in which to correct any estimated information provided. Members wishing to find out more should visit the HMRC website at: www.hmrc.gov.uk

What happens if you exceed the Annual Allowance (+) Click to open

What happens if I exceed the Annual Allowance?

If you exceed the annual allowance there may be an annual allowance charge to pay.

How much is the Annual Allowance Charge?

The annual allowance charge is not at a fixed rate but will depend on how much taxable income you have and the amount of your pension saving in excess of the annual allowance.

To find out how much you will pay, you will need to work out the rate of tax that would be charged if your excess pension savings were added to your taxable income and based on your marginal income tax rate.

It is your responsibility to check whether you have any unused annual allowance from the preceding three tax years to carry forward to the relevant tax year being assessed.

I am being made redundant, how do I know if I will be affected?

You will not be affected by being made redundant if your pensions" growth is usually below the annual allowance unless you receive an enhancement to your pensionable service. Any growth in excess of the annual allowance may be partially or fully offset by "carry forward" allowance.

Other redundancy payments which do not affect your pension or lump sum are not included in the annual allowance test.

 

Paying the Annual Allowance tax charge (+) Click to open

How do I pay any annual allowance tax charge?

You can pay the charge yourself directly to HMRC using their self assessment tax return or in certain circumstances you can ask your defined benefit pension scheme to pay the charge on your behalf - this is known as Scheme Pays.

Members of the some defined benefit occupational Scheme who meet certain criteria may elect to pay their tax charge via a corresponding reduction to their benefits, rather than by directly paying the tax charge via their self assessment tax return.

What is my responsibility in terms of disclosing my Annual Allowance Charge to HMRC?

It is your responsibility to ensure that any annual allowance charge is worked out, declared and paid in time to HMRC. The annual allowance charge must be declared to HMRC by completing a self assessment tax return. If necessary this can be obtained from HMRC by registering at: www.hmrc.gov.uk/sa/register.htm.

The self-assessment deadline for declaring and paying any tax due is 31 January following the end of the relevant tax-year.

HMRC's self-assessment process enables individuals to estimate any tax payable on their tax return. Individuals will then have 12 months in which to correct any estimated information provided. Members wishing to find out more should visit the HMRC website at: www.hmrc.gov.uk