The annual allowance is set by HMRC. It is the maximum your pension can increase by in a tax year before you receive a tax charge. All your benefits in the fund, and any AVCs and contributions to personal pensions or stakeholder arrangements, are added together each year to work out your pension input amount (PIA). This is tested against the annual allowance for each tax year.
The annual allowance for 2018/2019 tax year 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)
6 April 2018 to 5 April 2019 £40,000 (unless tapering applies)
How is the annual allowance worked out?
Your pensions growth is measured over the ‘pension input period’ (PIP). From 6 April 2016, PIPs for all pension schemes were brought in line with the tax year – 6 April to 5 April. Before 2016/2017 the PIP for the LGPS was 1 April to 31 March, except for the year 2015/2016 when special transitional rules applied.
In the LGPS the value of your pension benefits is worked out by multiplying your annual pension by 16. You should then add in any lump sum you may be entitled to, along with any AVCs you may have. If the difference in the value of pension benefits at the end of the PIP less the value of your pension benefits before the start of PIP (adjusted for inflation), is over the annual allowance limit, you may have to pay a tax charge.
How is an annual allowance tax charge triggered?
You will have a tax charge if your pensions input amount in a tax year exceeds the annual allowance for that year, plus any unused annual allowance you may have carried forward from the previous three years.
You may have more than one pensions input amount if you are paying into more than one pension scheme. Please take advice from a tax specialist if you think this applies to you.
Will you tell me if I exceed my annual allowance?
You will be sent a pensions savings statement if your savings in the Shropshire County Pension Fund exceed the annual allowance limit for that year.
Statement’s for 2017/2018 were sent out in October 2018. You need this statement to work out if you must pay a tax charge. If you need to pay a charge, there are different ways to do this.
If you have pension benefits elsewhere, you must take these into account. It’s your responsibility to pay the right amount of tax and you may need to take independent financial advice to make sure you understand your tax position.
What should I do if I get a pensions savings statement?
Step one – Think about any pensions savings you have made outside of the Shropshire County Pension Fund to work out your total pension savings over the tax year.
Step two – Think about any 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 from the previous three years to see if you have any 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 a tax charge, think about how you want to pay it. You can do this through a self-assessment tax return, ‘mandatory scheme pays’ or a combination of both.
Step six– fill out your self-assessment tax return by the deadline of 31 January. Make sure to mention your tax charge and how you will pay it.
Step seven – If you have chosen scheme pays, fill in the option form by the deadline of 31 July
How will the tax be collected?
Mandatory scheme pays
If you have breached the standard annual allowance, you may use ‘mandatory scheme pays’ if the following points are met:
- The annual allowance has been exceeded in the pensions scheme that the scheme pays election is made; and
- The annual allowance tax charge exceeds £2,000 and
- The relevant time limit for making an election has been met.
If you make an election requiring us to pay the annual allowance charge, both us (as the fund) and yourself become jointly liable for the tax charge. We must pay the tax, but you must report the amount of the tax that will be paid on your self-assessment tax return.
Voluntary scheme pays
If you do not meet the requirements for mandatory scheme pays to apply, or you do not make your nomination in time, you can ask us to pay the annual allowance tax charge on a voluntary basis. We are willing to take voluntary scheme pays elections where you incur a charge that is less than £2,000 and/or due to a tapered annual allowance. Unlike mandatory scheme pays, we would not have joint and several liability for the tax charge, the liability would remain with you. If the tax charge is also made up of pension savings built up elsewhere, you will have to pay the tax charge directly to HMRC yourself or make alternative arrangements.
If your scheme pays election is in excess of the maximum mandatory amount you must tell us the value of your tapered annual allowance.
It is important to note that for any voluntary scheme pays elections, the part of the tax charge over and above what could be met through a mandatory scheme pays election, remains the sole responsibility of you as the member. As such, any delay in payment beyond the 31 January, coincident with the fiscal period covered by this annual return, will attract late payment interest and charges. We take no responsibility and assume no liability for any such interest or charges. They cannot be settled by us as part of a voluntary scheme pays election.
What is the deadline for a scheme pays election to be made?
The deadline is 31 July, the following year that the annual allowance charge occurred. For the tax year 2017/2018 we must receive your election on, or before, 31 July 2019. Any elections received after this date will be rejected. For 2017/2018 voluntary elections, late payment and interest charges will accrue from 31 January 2019 until HMRC receives payment. Where possible we will make payment the quarter after we receive all required information. It is therefore important that voluntary scheme pays elections are received by us by 30 November 2018.
The tapered annual allowance
The standard annual allowance is £40,000. From the 2016/2017 tax year, if your income exceeds certain limits, 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 is £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 2018/2019 tax year is £4,000. If you are subject to the MPAA, you will get a tax charge on 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. If you exceed the MPAA, your annual allowance for other types of tax-relief pension savings, 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 stay 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 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 you pension schemes without facing an annual allowance charge.
An annual allowance quick check tool, for LGPS members can be found on the LGPS members website. This tool only lets you check the amount of annual allowance from 2016/2017 onwards.
Use the annual allowance calculator to check:
- How much annual allowance you’ve used
- If you’ve an annual allowance charge to pay
- If you’ve any unused annual allowance to carry forward
Where can I get independent financial advice?
If you would like independent financial advice, you must consult an independent financial adviser. You can find a registered adviser near you through the Unbiased website.
You are responsible for the costs of the advice.