The annual allowance (sometimes referred to as AA) is set by HMRC and is the maximum your pension can increase by in a tax year before tax charges are imposed. All your pension savings in the Fund, as well as any AVCs, contributions to personal pensions or any stakeholder arrangements you may be making, are added together each year to determine your Pension Input Amount (PIA). This is tested against the annual allowance for each tax year.
The Government reduced the annual allowance limit from £255,000 to £50,000 from 6 April 2011 and then reduced it again to £40,000 from 6 April 2014. Further changes to the annual allowance were made for higher earners from 6 April 2016, which has resulted in special transitional rules for the 2015/16 tax year. The annual allowance in 2017/18 is £40,000.
Previous years annual allowance limits:
Pension Input Period Annual allowance
1 April 2011 to 31 March 2012 £50,000
1 April 2012 to 31 March 2013 £50,000
1 April 2013 to 31 March 2014 £50,000
1 April 2014 to 31 March 2015 £40,000
1 April 2015 to 5 April 2016 £80,000 (transitional rules apply)
6 April 2016 to 5 April 2017 £40,000 (unless tapering applies)
6 April 2017 to 5 April 2018 £40,000 (unless tapering applies)
How is the annual allowance calculated?
The increase in the value of your pension savings in the LGPS in a year is calculated by working out the value of your benefits immediately before the start of the ‘pension input period’, increasing the value by inflation and then comparing it with the value of your benefits at the end of the ‘pension input period’.
The ‘pension input period’ (PIP) is the period over which your pension growth is measured. From 6 April 2016, PIPs for all pension schemes will be aligned with the tax year – 6 April to 5 April. Prior to the 2016/17 the PIP for the LGPS was 1 April to 31 March, except for the year 2015/16 when special transitional rules apply.
In the LGPS the value of your pension benefits is calculated by multiplying the amount of your annual pension by 16 and adding any lump sum you are automatically entitled to from the pension scheme, plus any AVCs you or your employer have paid during the year. If the difference in the value of pension benefits at the end of the PIP less the value of your pension benefits immediately before the start of PIP (adjusted for inflation), is more than the annual allowance limit, you may be liable to pay a tax charge.
How is an annual allowance tax charge triggered?
You will be subject to a tax charge if the total of your PIA in any tax year exceeds the annual allowance for that year, plus any unused annual allowance you have carried forward from the three prior years.
You may have more than one PIA if you are paying into more than one pension savings arrangement. Please take appropriate advice from a tax specialist if you think you may be affected by this.
Will I be notified by the Fund if I exceed my annual allowance?
You will be sent a pensions savings statement each year if your pension savings in the Shropshire County Pension Fund exceeds the annual allowance limit for that year. The statement will be based on the information the Fund holds on your pension record at the time of the calculation.
You will need this statement to work out whether you have to pay a tax charge. If you find that you do need to pay a tax charge, then there are different ways in which you can meet the charge.
If you have pension benefits elsewhere, you will also need to take these into consideration. It is your personal responsibility to pay the correct amount of tax and therefore please take your time to read and understand your pensions saving statement. You may need to take independent financial advice in order to ensure you understand your tax position.
What should I do having received a pensions savings statement?
Step One – Think about any additional pensions savings you have made outside of the Shropshire Pension Fund to work out your total pension savings over the tax year.
Step Two – Think about any additional pensions savings you have made outside of the Shropshire County Pension Fund to work out your total pension savings over the previous three years.
Step Three – Work out if you have any unused allowance over the previous three years to calculate your carry forward.
Step Four – Using your carry forward, work out if you have triggered an Annual Allowance tax charge (the HMRC annual allowance calculator can help).
Step Five – If you have triggered an annual allowance tax charge, decide whether you wish to meet the tax charge through Self-Assessment tax return, use ‘Mandatory Scheme Pays’ or a combination of both. See option below.
Step Six– fill out your Self-Assessment tax return by the deadline of 31 January 2018 declaring your tax charge and how payment will be made.
Step Seven – If you have chosen scheme pays, fill out the option form, which can be provided by Shropshire Pension Fund on request, by the deadline of 31 July 2018.
How will the tax be collected?
If you exceed the Annual Allowance in any year you are responsible for reporting this to HMRC on a self-assessment tax return.
Where an Annual Allowance tax charge is greater than £2,000, on pension growth that exceeds the £40,000 annual allowance, you can elect for the Shropshire Pension Fund (assuming this is the pension scheme under which your tax charge has arisen) to meet the charge in full on your behalf. This is known as “Mandatory Scheme Pays”. The Fund will then apply a reduction to your pension. The basis upon which the reduction is calculated will be determined by the Government Actuaries’ Department (GAD).
The deadlines for reporting a tax charge to HMRC and choosing the “Mandatory Scheme Pays” option are set out in the diagram on page 3 of your Pension Savings Statement.
The Pension Fund, at their discretion, may also agree to pay some or all of an annual allowance charge on your behalf in other circumstances e.g. where your pension savings are not in excess of the standard Annual Allowance but are in excess of the tapered Annual Allowance. This is known as “Voluntary Scheme Pays”. The Shropshire County Pension Fund at present does not have a policy in place to offer “Voluntary Scheme Pays”.
The tapered annual allowance
The standard annual allowance is currently £40,000. From the 2016/2017 tax year, if your income exceeds certain thresholds, your annual allowance for pension savings in that tax year will be reduced. You could be subject to a gradual tapering of annual allowance if your total income (including savings and investment income), which is subject to tax, is more than £110,000 in any tax year. The maximum reduction will be £30,000, leaving a minimum annual allowance of £10,000 in a tax year.
Taking benefits under pension freedom rules
The money purchase annual allowance (MPAA) applies if you have taken pension benefits flexibly under ‘pension freedom rules’ on, or after, 6 April 2015, you will be subject to the MPAA from that point. The MPAA for the tax year 2016/2017 was £10,000. This reduced to £4,000 in the 2017/18 tax year. If you are subject to the MPAA, you will incur a tax charge on any subsequent contributions to money purchase pensions which exceed this limit in any tax year. This is based on both contributions made by you, or on your behalf. In any year if you exceed the MPAA, your annual allowance for other types of tax-relieved pension saving, such as defined benefits, is reduced by £4,000 to £36,000.
If you are subject to both the MPAA and the tapered annual allowance, your MPAA will remain at £4,000. However, if in any year you exceed the MPAA, your allowance for other types of pensions savings (normally £30,000) will be reduced on a tapered basis, potentially removing the whole £30,000. The tapered annual allowance will be personal to you and determined by your financial circumstances.
For further information about reducing the MPAA, visit the gov.uk website.
Annual allowance calculator
HMRC have an annual allowance calculator to help you work out how much annual allowance you have used and how much you can contribute to your pension schemes without facing an annual allowance charge.
The calculator includes the transitional annual allowance rules for 2015 to 2016 and will help you check whether you need to declare an annual allowance tax charge on your self-assessment return.
An annual allowance quick check tool can now found on the LGPS members website. Please be aware that the tool only allows you to check the amount of annual allowance used from 2016/17 onwards.
Use the annual allowance calculator to check:
- How much annual allowance you have used
- If you have an annual allowance charge to pay
- If you have any unused pension annual allowances to carry forward
View the annual allowance calculator here.
How can I access independent financial advice?
If you would like personal independent financial advice about any decisions you need to make, you must consult an Independent Financial Advisor. You can find an advisor near you at www.unbiased.co.uk/.
You should note that you will be responsible for any costs incurred.
LGPS member quick check annual allowance tool (this tool only allows you to check the amount of annual allowance used from 2016/17 onwards)
Shropshire newsletter annual allowance March 2016