The annual allowance
The annual allowance is the amount your pension savings can increase by in a year without you having to pay extra tax. If your savings increase by more than the annual allowance, you will have to pay tax on the excess. The standard annual allowance increased from £40,000 to £60,000 on 6 April 2023.
Your annual allowance 03:22
Tax rules limit how much pension you can build up each year without having to pay a tax charge. This video explains how the annual allowance works.
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Who is affected by the annual allowance?
Most people aren’t affected by the annual allowance because their pension savings don’t increase by more than £60,000 in a year. You are most likely to be affected if one or more of these statements applies to you:
- You have final salary membership and you receive a significant pay increase. Membership built up before 1 April 2015 is final salary membership. You could also have final salary membership that you transferred from another public service pension scheme.
- You combine a previous LGPS pension benefit that was built up in the final salary section of the LGPS and your salary is higher than it was when you left the Scheme.
- You transfer pension rights that include final salary benefits into the LGPS from another public service pension scheme and your current salary is higher than your salary was when you left the other pension scheme.
- You pay a high level of additional contributions.
- You are a high earner.
- You have accessed flexible benefits since April 2015.
How is the annual allowance worked out?
The increase in the value of your LGPS benefits in a year is calculated by:
- working out the value of your benefits before the start of the ‘pension input period’
- increasing that amount by inflation
- comparing it with the value of your benefits at the end of the ‘pension input period’
- adding any Additional Voluntary Contributions (AVCs) that you or your employer has paid during the year.
The pension input period is the same as the tax year – 6 April to 5 April.
The value of your LGPS benefits is:
- your annual pension multiplied by 16 plus
- any lump sum you are automatically entitled to. You will have an automatic lump sum if you joined the LGPS before 1 April 2009.
If the value of your pension benefits at the end of the year less their value before the start of the year is more than the annual allowance, you may have to pay a tax charge.
The annual allowance applies to all pension schemes, not just the LGPS. If you pay into more than one pension scheme in a year, you will need to find out the total increase in pension savings across all schemes to find out if you have exceeded the annual allowance.
You can use the Annual allowance quick check tool to check if your LGPS pension savings are likely to exceed the annual allowance.
Carry forward
The carry forward rule allows you to carry forward unused annual allowance from the three previous years. This means that you may not have to pay an annual allowance tax charge, even if the value of your pension savings increases by more than the annual allowance in a year. To carry forward unused annual allowance from an earlier year, you must have been a member of a tax-registered pension scheme in that year.
The tapered annual allowance for high earners
The annual allowance is reduced or ‘tapered’ for higher earners. The annual allowance will be reduced if your ‘Threshold income’ and ‘Adjusted income’ exceed the limits in a year. For every £2 that your Adjusted Income exceeds the limit, your annual allowance is reduced by £1. Your annual allowance cannot be reduced below the minimum. These limits changed from April 2020 and then again from April 2023. The table below shows the limits that apply.
| Term | Definition | Limit 2016/17 to 2019/20 | Limit 2020/21 to 2022/23 | Limit 2023/24 onwards |
|---|---|---|---|---|
| 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 |
| Minimum annual allowance | The minimum annual allowance that can apply | £10,000 | £4,000 | £10,000 |
Flexible benefit access and the annual allowance
If you have benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed since 6 April 2015, then the money purchase annual allowance rules may apply. This includes where you withdraw a taxable lump sum from your AVCs. This will only be the case if your total contributions to a money purchase arrangement (such as AVCs) exceed the money purchase annual allowance in a year.
If your contributions exceed the money purchase annual allowance, your pension savings in the LGPS will be measured against the alternative annual allowance.
| Tax year | Money purchase annual allowance (MPAA) | Alternative annual allowance if MPAA exceeded |
|---|---|---|
| 2016/17 | £10,000 | £30,000 |
| 2017/18 to 2022/23 | £4,000 | £36,000 |
| 2023/24 onwards | £10,000 | £50,000 |
If you access flexible benefits, your pension scheme must give you a flexible access statement. If you accessed flexible benefits in a different pension scheme, you should give your LGPS pension fund a copy of this statement.
Exceeding the annual allowance
Your pension fund must tell you if your pensions savings in the LGPS exceed the annual allowance in a tax year. They must inform you within six months of the end of the tax year – by 6 October. Your pension fund is not required to tell you if you have exceeded the tapered annual allowance.
If you exceed the annual allowance in a year, you must report this to HMRC in your self-assessment tax return.
If you have an annual allowance tax charge that is more than £2,000, you may be able to opt for the LGPS to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension. This is known as ‘scheme pays’. If you are retiring, you must elect for scheme pays before you take your pension. Contact your pension fund to find out more about scheme pays and the time limits that apply.
If you wish to slow down your pension build-up, you may wish to consider joining the 50/50 section. In the 50/50 section you pay half your normal contributions and build up pension at half the normal rate. You retain full life cover and ill health cover. You can find out more about 50/50 in the Paying less section.
Before taking any action to reduce your tax liabilities you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser.