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 2024/2025 tax year is £60,000.
Previous years’ annual allowance limits:
Pension input period Annual allowance
6 April 2021 to 5 April 2022 £40,000 (unless tapering applies)
6 April 2022 to 5 April 2023 £40,000 (unless tapering applies)
6 April 2023 to 5 April 2024 £60,000 (unless tapering applies)
6 April 2024 to 5 April 2025 £60,000 (unless tapering applies)
Your LGPS benefits may have grown in two ways.
CARE build up
First is the build up of pension in your ‘CARE’ account. CARE stands for career average revalued earnings and we take 1/49 of your actual pay each year and add this as annual pension to your ‘CARE’ pot.
Let’s take the example of someone who earns £75,000 a year. In that year and ignoring the complication of revaluation (cost of living increases) to CARE benefits, this person has increased their annual pension via CARE benefits by £75,000 / 49 = £1530.61. This gives rise to a pension input of £1,530.61 x 16 = £24,489.80.
Increase in final pay
Members who were in the scheme prior to the introduction of the ‘CARE’ scheme in April 2014, accrued ‘final salary’ benefits. These are benefits that are based on final pay and up to 31/03/2008 the accrual rate was 1/80 plus an automatic lump sum (one off payment) of 3/80. From 01/04/2008 the automatic lump sum was removed and the accrual rate for annual pension increased to 1/60. As these benefits are based on final pay, to assess the growth in these benefits we must use the full time equivalent (FTE) pay information provided by your employer each April. As your pay grows, so does the value of your benefits.
Let’s continue our example and to keep it simple, let’s say the person has six years in the 1/60 scheme and their FTE pay as at 05/04/2022 was £60,000 and their FTE pay as at 05/04/2023 was £75,000. Then growth in pension in the period 06/04/2022 – 05/04/2023 is as follows:
Annual pension as at 05/04/2022 is £60,000 x 6 years x 1/60 = £6,000
Uprate by 3.1% CPI (as at September 2021) = £6,000 x 1.031 = £6,186
Annual pension as at 05/04/2023 is £75,000 x 6 years x 1/60 = £7,500
Growth in annual pension = £7,500 - £6,186 = £1,314
Pension input is 16 x £1,314 = £21,024
Total pension input for this member is £24,489.80 + £21,024 = £45,513.80
HMRCs annual allowance limit for 2022/2023 is £40,000 and therefore this person has exceeded the annual allowance by £5,513.80.
The example above shows how LGPS benefits are assessed for annual allowance purposes. This is a simplified example that has ignored revaluation of CARE benefits and additional voluntary contributions paid by the member.
It’s important to note that changes in FTE pay do have a significant impact on pension growth, especially as HMRC require us to multiply growth by 16.
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.
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)
6 April 2019 to 5 April 2020 £40,000 (unless tapering applies)
6 April 2020 to 5 April 2021 £40,000 (unless tapering applies)
6 April 2021 to 5 April 2022 £40,000 (unless tapering applies)
6 April 2022 to 5 April 2023 £40,000 (unless tapering applies)
6 April 2023 to 5 April 2024 £60,000 (unless tapering applies)
You'll 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're paying into more than one pension scheme. Please take advice from a tax specialist if you think this applies to you.
You'll be sent a pensions savings statement each year by the fund if your savings in the Shropshire County Pension Fund exceed the annual allowance limit for that year, in other words, if your savings in a pension input period are more than the annual allowance. The fund is required by HMRC to provide you with this statement by 6th October following the end of the tax year.
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've 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.
Step one – Think about any pensions savings you've 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've 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've any unused allowance from the previous three years to see if you've any carry forward.
Step four – Using your carry forward, work out if you've triggered an annual allowance tax charge (the HMRC annual allowance calculator can help).
Step five – If you've 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'll pay it.
Step seven – If you've chosen scheme pays, fill in the option form by the deadline of 31 July
Mandatory scheme pays
If you've breached the standard annual allowance, you may use ‘mandatory scheme pays’ if the following rules are 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 don't meet the requirements for mandatory scheme pays to apply, or you don't make your nomination in time, you can ask us to pay the annual allowance tax charge on a voluntary basis. We're 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 wouldn't 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'll 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's 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 can't 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 happened. For the tax year 2017/2018 we must get 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'll make payment the quarter after we've received all required information. It's therefore important that voluntary scheme pays elections are received by us by 30 November 2018.
The standard annual allowance is £60,000. 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 affected by a gradual tapering of annual allowance if both of the following apply in tax year 2023/2024:
For anyone affected by the tapered annual allowance, for every £2 of their adjusted income that is more than £260,000, their annual allowance for that year will reduce by £1.
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 2023/2024 tax year is £10,000. 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 £10,000 to £50,000.
If you are subject to both the MPAA and the tapered annual allowance, your MPAA will stay at £10,000. 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.
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 member website. This tool only lets you check the amount of annual allowance from 2016/2017 onwards.
Use the annual allowance calculator to check:
If you'd like independent financial advice, you must consult an independent financial adviser. You can find a registered adviser near you through the Unbiased website.
You're responsible for the costs of the advice.