Your Annual Allowance questions answered
The Annual Allowance applies to everyone who contributes to pension schemes in the UK. Here are some of the questions we're frequently asked about this complicated topic.
What is the Annual Allowance?
The Annual Allowance limits the amount you can contribute to pension schemes each year while receiving tax relief. There is a standard limit (currently £40,000) which may be reduced depending on your earnings.
For defined benefit schemes, like those administered by SPPA, the limit applies to the value of benefits that you hold in the scheme rather than the actual contributions made by you and your employer. This is because the value of your pension is calculated from your service and pensionable salary rather than being linked to your contributions. If the value of your pension benefits increases by an amount over the Annual Allowance you may have to pay a tax charge.
What is the pension input amount?
The pension input amount is the capitalised value of growth of your pension benefits in a pension input period - the value at the end minus the value at the start. This is the amount that's limited by the Annual Allowance.
What is the pension input period?
The pension input period is the period over which the pension growth is assessed. It's now aligned with the tax year which runs 6 April to 5 April.
What is the 'opening value' of my benefits?
This is the capital value of your benefits at the beginning of the pension input period. It is generally the previous closing value increased by the Consumer Price Index from the previous September.
What is the 'closing value' of my benefits?
The capitalised value of the benefits at the end of the pension input period.
What is included in the pension input amount?
The growth in your pension scheme benefits, including any doubled years, added years or additional pension being purchased.
How is the capital value of my benefits calculated?
To work out your capital value, take the value of your pension, multiply it by a factor of 16, and add any lump sum payable (without taking into account the option to give up pension in exchange for lump sum).
So, for example, a pension worth £4,000 a year has a capital value of £64,000 (16 x £4,000 = £64,000). If this pension grows by £700 in the pension input period to £4,700 a year it now has a capital value of £75,200 (16 x £4,700 = £75,200), which means the pension input amount is £11,200 (£75,200 - £64,000 = £11,200).
How is the pension input amount so much when you didn't pay that much in contributions?
For defined benefit pension schemes like those administered by SPPA, pension savings are calculated based on the growth in the value of your benefits, NOT the contributions paid by members and employers. Final salary scheme benefits are based on your service and salary and Career Average Revalued Earnings scheme benefits accrue at a percentage of actual earnings.
These defined benefit schemes are often more generous than defined contribution schemes, so pension growth often outstrips contributions.
For example if your pension grows by £4,000, although the capitalised value of this growth is 16 x £4,000 = £64,000 you and your employer won't have paid £64,000 in contributions.
Am I at risk of exceeding the Annual Allowance?
Most of the members in SPPA-administered schemes do not exceed the Annual Allowance limits but you may be affected if you:
receive a significant pay rise such as being promoted to a higher paid role
- are a high earner
- earn pension at a higher rate of accrual
- have long pensionable membership.
- have a significant increase in membership (for example, a change from part-time to full-time, doubled membership for Mental Health Officers and Police Officers).
- are purchasing added years and/or additional pension.
- have late retirement factors applied
- receive a clinical excellence award in the NHS
- retire due to ill health with an enhancement to your membership
- retire due to ill health without an enhancement to your benefits but the outstanding costs of a purchase of added years and/or additional pension are waived.
- paid contributions to other pension savings arrangements, including a Money Purchase Additional Voluntary Contributions Scheme.
- have taxable earnings above £110,000 which may mean your Annual Allowance is reduced.
If you think you'll exceed the Annual Allowance you should consider speaking to a financial or tax advisor.
What happens if I exceed the Annual Allowance?
You'll receive an Annual Allowance statement from SPPA by 6th October if you breach the standard Annual Allowance in a single SPPA scheme. You should note, however, that you may have benefits in more than one SPPA-administered scheme as well as other private arrangements so you'll have to consider your combined pension growth across all of your pension schemes. If you think you may exceed the limit but be below the limit in each scheme individually you should consider requesting an 'on demand' statement.
If you exceed the Annual Allowance you'll need to calculate your pension growth from all your pension providers for the relevant year and the previous three years. You can 'carry forward' unused annual allowance from the previous three years to potentially offset any tax charge.
If your remaining pension growth is still above the Annual Allowance you will be subject to the Annual Allowance charge.
What is the Annual Allowance charge?
The Annual Allowance charge is a tax charge payable to HMRC. It is levied on any pension savings above the Annual Allowance limit (after accounting for carry forward) at your highest marginal rate.
For example, a member has a tax charge in 2017/18 as they exceeded the Annual Allowance even after accounting for carry forward. This means there's no carry forward available for 2018/19. The 2018/19 pension input amount is £65,000 and the Annual Allowance limit is £40,000. The £25,000 'breach' will be subject to tax. If the member is a higher rate tax payer, the amount to pay will be 46% of £25,000.
How do I pay the Annual Allowance charge?
You have 2 options for paying the Annual Allowance charge.
You can pay directly to HMRC if you wish. Payments are due by your normal tax return date and made through your tax return.
You can ask the pension scheme administrators to pay all or part of the charge on your behalf to HMRC, as a 'Scheme Pays'.
Mandatory Scheme Pays can be used if:
- your Pension Input amount within a single scheme exceeds the £40,000 Annual Allowance; and
- your total tax charge is over £2,000; and
- your application is received by SPPA by the deadline.
If you do not meet the mandatory conditions, SPPA voluntarily accepts the Scheme Pays elections where the total SPPA tax charge exceeds £1000, the charge is due to growth in combined SPPA scheme benefits and/or you are subject to the tapered annual allowance.
You should consider taking financial advice before deciding whether to ask your scheme to pay anything or not.
Any Scheme Pays election must reach us by 31 July, the year after the Annual Allowance charge year e.g. for 2018/19 the deadline is 31 July 2020. This is after your tax return deadline and any amount that does not meet the mandatory Scheme Pays conditions above may be subject to interest and charges from HMRC.
Any tax liability not paid using Scheme Pays must be paid directly to HMRC.
HMRC has produced a members guide with information about Scheme Pays which you may find useful.
What is 'carry forward'?
If you exceed the Annual Allowance in any one tax year, you can look back up to three previous years to see if you have any unused allowance from these years. If you do, you can 'carry forward' any unused allowance and add this to your allowance in the current year.
There is a strict order in which available Annual Allowance must be used up:
- The Annual Allowance for the current tax year should be used first.
- Unused Annual Allowance from the three earlier years is then used, beginning with the available Annual Allowance from the earliest tax year first.
Annual Allowance for the following years is £40,000. Assume member has no carry forward from previous years and is entitled to the full £40,000 Annual Allowance .
2016/17 input = £37,000 leaving £3,000 carry forward
2017/18 input = £36,000 leaving £4,000 carry forward
2018/19 input = £41,000. £1,000 carry forward from 2016/17 can be used so no tax is payable
2019/20 input = £54,000. £2,000 carry forward left from 2016/17 is still available and £4,000 from 2017/18.
£54,000 input - £40,000 Annual Allowance - £2,000 (2016/17 carry forward) - £4,000 (2017/18 carry forward) = £8,000 taxable
If the member's marginal tax rate is 41%, the tax payable is £8,000 x 0.41 = £3,280.
For 2020/21 there will be no carry forward available
Why is my pension input zero?
If the value of your benefits at the end of the pension input period is lower than the value of your benefits at the start of the pension input period, your pension input amount would be treated as zero for that pension input period and the full Annual Allowance for that year would remain available to you to carry forward. This can happen in final salary pension schemes where the Consumer Price Index is higher than any pay increase received, since pension benefits are directly linked to pay. You would never have a negative pension input in a Career Average Revalued Earnings scheme.
Why does my pension input amount vary so much each year?
Pension input amount is based on the growth in the value of your benefits, NOT the contributions paid by members and employers. Final salary benefits are based on your service and salary and Career Average Revalued Earnings scheme benefits accrue at a percentage of actual earnings.
So a large input in a final salary scheme can be explained by, for example, a large increase in full time equivalent pensionable salary (due to, say, a promotion or a clinical excellence award in the NHS), a significant increase in service (for example, awarded double years, or moving from part time to full time).
How does the Consumer Price Index affect pension input?
In a final salary pension scheme, the closing value of pension is service x salary x relevant accrual rate. The opening value is the previous closing value increased by the Consumer Price Index.
So if Consumer Price Index is high, the opening value is higher and the difference between the closing and opening values would be less than if Consumer Price Index was zero.
Can I request a pension savings statement?
If we have received all the relevant information from your employer to calculate the pension input amount we'll write to you by 6 October, or within three months of receiving your request if this is later. Requests can only be accepted from 6 April following the relevant tax year. We can't, unfortunately, accept requests for all future years.
What is included in a pension savings statement?
The pension savings statement will include:
- The amount of the Annual Allowance for the relevant tax year and the previous three
- The pension input amount for the relevant pension input period and the previous three.
What about Additional Pension?
Any increase to your pension benefits from the purchase of Additional Pension will need to be assessed against the Annual Allowance. If the growth in benefits in the pension input period exceeds the Annual Allowance, an Annual Allowance charge may become payable in the usual way, depending on carry forward.
If you buy Additional Pension by regular contributions, the amount purchased to date will be included in opening and closing pension values.
If you buy £2500 for example by lump sum, your pension will grow by £2500 x 16 = £40,000 from this transaction. This, along with normal pension growth and carry forward will need to be considered when calculating any Annual Allowance charge liability.
What about contributions to other pension arrangements?
It is your total pension savings that are subject to the Annual Allowance limit. If you're contributing to any other registered pension schemes these will also need to be included by you when calculating how much your pension benefits have grown by in any one year. SPPA has no knowledge of your pension benefits held elsewhere.
Are there any exemptions?
The Annual Allowance will not be applied:
- to deferred/preserved benefits in the scheme (unless the benefits are accrued in the current pension input period).
- if in a serious/terminal ill health case, our medical advisors have confirmed that you have met the HMRC severe ill health criteria.
What if I retire through ill health and receive enhanced benefits?
If you're retiring due to ill health and qualify for enhanced benefits, it's possible your pension growth could exceed the Annual Allowance in your retirement year.
If you retire through ill health and you're awarded the higher level of enhanced ill health benefits, you'll be subject to a further HMRC severe ill health test, assessed by the scheme medical advisor. This is defined as "unlikely because of ill health to be able to do any type of gainful work, other than to an insignificant extent, before State Pension age".
Members who meet the scheme criteria for enhanced benefits but do not meet HMRC's test will be subject to the Annual Allowance restrictions.
Members who meet HMRC's severe ill health test will be exempt from the Annual Allowance restrictions. This exemption is only applicable in the year a member meets the HMRC severe ill health test, therefore it is important to ensure that this is the same tax year as your benefits will be paid.
It is, therefore, in your own interest to ensure that your application for ill health retirement is accompanied with sufficient medical evidence to support your application.
What if I take my benefits earlier than my normal pension age in exchange for a reduced pension?
The opening value of benefits is worked out as normal with no reduction applied. The closing value is worked out taking the actuarial reduction in pension into account.
What if I want to retire and give up part of my pension in exchange for a lump sum?
Pension input from the beginning of the pension input period to your retirement date is calculated based on the standard pension calculation before any options to increase lump sum are executed.
What about NHS members with Mental Health Officer status?
Some members, including Mental Health Officers, can benefit from additional service being added to their standard pension calculation. This enhancement is included when calculating pension input.
If I transfer into the NHS, Teachers', Police or Firefighters' schemes, is this counted against the Annual Allowance?
If you transfer benefits into the NHS, Teachers', Police or Firefighters' schemes this can affect your pension input in the year of transfer.
If the transfer was from a final salary occupational scheme that participates in the Public Sector Transfer Club and the transfer was before 28 January 2015, it will be excluded in the year of the transfer.
Are the details on my benefit statement applicable to the Annual Allowance calculation?
The details on your benefit statement relate to the scheme year, 1 April to 31 March. Although this may give you an idea of what your pension input amount would be, the Annual Allowance relates to the financial year, 6 April to 5 April.
I am a General Medical Practitioner - when will my provisional pension savings statement be sent out?
Your pension savings statement can only be produced after we’ve received your certified earnings data from Practitioner Services Division.
If we have your information before 6 July, you'll receive a statement by 6 October if you’ve exceeded the Annual Allowance in a single registered scheme.
What is tapered Annual Allowance?
The tapered annual allowance was introduced in 2016/17 and can cause a reduced annual allowance limit if the threshold income and adjusted income limits are both exceeded.
For every £2 that the adjusted income limit is exceeded by, the annual allowance limit is reduced by £1. A minimum annual allowance limit is set each year.
If the threshold income limit is exceeded but the adjusted income limit is not then the tapered annual allowance does not apply.
Details of these limits are below:
|Year||Threshold Income Limit||Adjusted Income Limit||Minimum Annual Allowance Limit|
Further information on tapered annual allowance and how to work out your threshold and adjusted income can be found via HMRC.
SPPA is not responsible for establishing if any individual is subject to the tapered annual allowance. If you feel you may be affected by this we would suggest seeking professional advice and contacting SPPA each year to request an annual allowance pension savings statement.