Your Pensions Annual Allowance
Since 2006, the government has limited the amount of tax relief that you can receive on pension savings.
If you exceed the Annual Allowance for the amount that you can build up in your pension schemes in any given year and benefit from tax relief, you may incur an Annual Allowance tax charge. The Annual Allowance limit was changed from £40,000 to £60,000 on 06 April 2023 as part of the spring budget 2023.
The Annual Allowance limit includes all superannuation and private pensions but does not include the UK State Pension.
The allowance is measured against the annual growth in your pension during what’s termed the ‘pension input period’ (which is now the tax year from 6 April to 5 April each year).
It’s calculated as the increase in the value of your pension benefits (annual pension and any mandatory lump sum) after allowing for inflation (which is linked to the Consumer Price Index).
For defined benefit 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.
The increase in annual pension value is multiplied by a factor of 16, then any increase in an automatic lump sum is added. This provides you with the growth to be assessed against the Annual Allowance limit for the tax year.
What happens if you exceed the Annual Allowance
If you exceed the Annual Allowance limit in one of our schemes, we will issue you with a Pension Savings Statement. It will show your 'pension input amounts' (PIA) for the current tax year and three previous tax years if applicable. If you have unused Annual Allowance from the previous three years, you can carry this forward to offset against any potential Annual Allowance tax charge.
Tapered Annual Allowance
If you earn more than the Threshold income from all your sources of income, you’ll be affected by what’s known as Tapered Annual Allowance.
For every £2 over the adjusted income limit, the Annual Allowance limit is reduced by £1. Effectively, this mechanism reduces your Annual Allowance on a phased basis. 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 |
|---|---|---|---|
| 2023/2024 | £200,000 | £260,000 | £10,000 |
| 2022/2023 | £200,000 | £240,000 | £4,000 |
| 2021/2022 | £200,000 | £240,000 | £4,000 |
| 2020/2021 | £200,000 | £240,000 | £4,000 |
| 2019/2020 | £110,000 | £150,000 | £10,000 |
| 2018/2019 | £110,000 | £150,000 | £10,000 |
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 suggest seeking professional advice and contacting SPPA each year to request an Annual Allowance Pension Savings Statement.
Paying your Annual Allowance tax
charge If you establish you have to pay an Annual Allowance tax charge, you can settle this directly with HMRC or elect to use Scheme Pays. A Scheme Pays election would mean that SPPA pay the tax charge on your behalf in exchange for a permanent deduction to your pension benefits. SPPA will only accept a Scheme Pays election for your SPPA pension scheme liabilities in excess of your Annual Allowance. To qualify for Scheme Pays you must meet the HMRC requirements.
Annual Allowance and Club Transfers
If you complete a transfer of pension rights using the Public Sector Transfer Club, any growth in pension benefits arising from a pensionable pay increase when you move between Club schemes must be taken into account when calculating the pension input amount for Annual Allowance purposes.
In final salary schemes this means that if there is a significant difference in the pensionable pay of your transferred benefits in the previous scheme, and the current pensionable pay then there could be significant pension input.
This brings transferring members in line with members who receive an increase in pensionable pay without changing schemes.
Career average pension schemes also need to ensure that any enhanced revaluation applied to cover a break in employment is included in the calculation of the pension input amount.
Any adjustment to pension benefits to reflect differences in Club schemes is excluded.