Annual Allowance

HM Revenue and Customs impose two controls on the amount of pension savings you can make without having to pay extra tax. These controls are known as the Annual Allowance and Lifetime Allowance. This is in addition to any income tax you pay on your pension once it is in payment.

What is the Annual Allowance?

The Annual Allowance (AA) is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. This is in addition to any income tax you pay on your pension once it is in payment.

If the value of your pension savings in any one year (including pension savings outside of the LGPS (NI)) is in excess of the Annual Allowance limit, the excess will be taxed as income.

The Government reduced the AA 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 AA were made for higher earners from 6 April 2016, which resulted in special transitional rules for the 2015/16 tax year. These changes are covered in more detail below.

 Pension Input PeriodAnnual 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 onwards£40,000 (unless tapering applies)

Am I likely to be affected by the Annual Allowance?

Most people will not be affected by the AA tax charge because the value of their pension savings will not increase in a year by more than £40,000, or if it does, they are likely to have unused allowance from previous years that can be carried forward.

You are most likely to be affected if one or more of the statements below applies to you:

  • You have membership of the LGPS (NI) that was built up in the final salary section (built up before 1 April 2015 or you transferred in membership from another public sector pension scheme¹ which retains a final salary link) and you receive a significant pay increase,
  • You pay a high level of additional contributions,
  • You are a higher earner,
  • You transfer pension rights into the LGPS (NI) from a previous public sector pension scheme under the preferential club transfer rules and your salary (full-time equivalent) on joining the LGPS (NI) is higher than the salary you earned when you left the previous scheme,
  • You combine a previous LGPS (NI) pension benefit that was built up in the final salary section of the LGPS (NI) with your current pension account and your salary (full-time equivalent) has increased significantly since leaving the Scheme,
  • You have accessed flexible benefits on or after 6 April 2015.

NILGOSC will let you know by 6 October if your LGPS (NI) pension savings exceed the standard AA in the tax year just ended on 5 April.

The 50/50 section of the LGPS (NI)

If you wish to slow down your pension build up the 50/50 section of the LGPS (NI) allows you to pay half your normal contributions and build up half your normal pension, whilst still retaining full life and ill-health cover. You can join this section of the Scheme by completing and returning an LGS12 – Election to join the 50/50 section of the Scheme form.

Before considering any action to reduce your tax liabilities you should always seek independent financial advice from an FCA registered adviser. For help in choosing an independent financial adviser visit MoneyHelper.

How is the Annual Allowance calculated?

The increase in the value of your pension savings in the LGPS (NI) 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 were aligned with the tax year – 6 April to 5 April. Before 2016/17 the PIP for the LGPS (NI) was 1 April to 31 March, except for the year 2015/16 when special transitional rules applied.
In the LGPS (NI) 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 has paid during the year.

If 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 AA limit then you may be liable to pay a tax charge.
It is important to note that the assessment for the AA covers any pension benefits you may have where you have been an active member during the year, not just benefits in the LGPS (NI). For example, if the increase in the value of your LGPS (NI) benefits was calculated as £30,000 in 2019/20 when the AA limit was £40,000, but you also had an increase in the value of other pension benefits of £15,000 in the same year, that would mean you had a total increase in pension benefits of £45,000. If you did not have any carry forward (see the next page for more information), you would be liable for a tax charge for the amount you exceeded the AA by, even though you did not breach the AA in either scheme.

Carry Forward

You would only be subject to an AA tax charge if the value of your total pension savings for a year increased by more than the AA for that year. However, the three year carry forward rule allows you to carry forward unused AA from the previous three years. This means that even if the value of your pension savings increases by more than the AA in a year, you may not be liable for an AA tax charge.

Example: if the value of your pension savings in 2019/20 increased by £50,000 (£10,000 more than the AA) but in the three previous years had only increased by £25,000, £28,000 and £30,000, then the amount by which the increase in your pension savings fell short of the AA limit for those three years would more than offset the £10,000 excess pension saving in the current year. There would be no AA tax charge to pay in this case.

To carry forward unused AA from an earlier year you must have been a member of a tax registered pension scheme in that year.

Changes to Annual Allowance

The Finance (No 2) Act 2015 introduced two important changes to the AA with effect from 6 April 2016:

  1. Introduced an Annual Allowance taper for higher earners from 6 April 2016
  2. Adjusted the ‘pension input period’ during 2015/16 so that it aligned with the tax year from 6 April 2016

1. Tapered Annual Allowance for higher earners

From the tax year 2016/17 the AA was tapered for members who have a ‘Threshold Income’ in excess of £110,000, and ‘Adjusted Income’ in excess of £150,000. For every £2 that your Adjusted Income exceeds £150,000, the AA was tapered down by £1 (to a minimum of £10,000). The limits for ‘Threshold Income’, ‘Adjusted Income’ and the minimum AA are changed for the 2020/21 year.

DefinitionLimits
2016/19 – 2019/20
Limits for 2020/21 onwards
Threshold IncomeBroadly your taxable income after the deduction of your pension contributions (including AVCs deducted under the net pay arrangement)£110,000£200,000
Adjusted IncomeBroadly your threshold income plus pensions savings built up over the tax year£150,000£240,000
Minimum Annual Allowance (AA)If your AA is tapered, the minimum AA that can apply£10,000£4,000

Threshold income includes all sources of income that are taxable e.g. property income, savings income, dividend income, pension income, social security income (where taxable), state pension income etc.

You are not allowed to deduct from taxable income any amount of employment income given up for pension provision as a result of any salary sacrifice made on or after 9 July 2015.

How does the taper work?

From 6 April 2020, the taper reduces the AA by £1 for every £2 of adjusted income over £240,000, until a minimum AA of £4,000 is reached. This means that from 6 April 2020 the AA for higher earners will be as follows:

Adjusted IncomeAnnual Allowance
£240,000 or below£40,000
£250,000£35,000
£260,000£30,000
£270,000£25,000
£280,000£20,000
£290,000£15,000
£300,000£10,000
£312,000 or above£4,000

From 6 April 2016 to 5 April 2020, the taper reduced the AA by £1 for £2 of adjusted income received over £150,000, until a minimum AA of £10,000 is reached. This meant that from 6 April 2016 to 5 April 2020 the AA for higher earners was as follows:

Adjusted IncomeAnnual Allowance
£150,000 or below£40,000
£160,000£35,000
£170,000£30,000
£180,000£25,000
£190,000£20,000
£200,000£15,000
£210,000 or above£10,000

Examples (under limits for 2016/17 – 2019/20)

Trevor
Gross Salary 2019/20: £120,000
Less employee pension contributions: £12,600 (10.50% of salary)
Threshold Income 2019/20: £107,400 (Below £110,000 so the AA will not be tapered for 2019/20 and remains at £40,000)
Pensions saving in the year: £39,184 (Less than £40,000 so no tax charge)

Sinead
Gross Salary 2019/20: £130,000
Less employee pension contributions: £13,650 (10.50% of salary)
Plus taxable income from property: £30,000
Threshold Income 2019/20: £146,350
Plus pensions saving in the year: £42,449 (Less than £40,000 so no tax charge)
Adjusted Income 2019/20: £188,799 (Greater than £150,000 so AA will be tapered)
Tapered AA: £20,601*
In excess of AA: £21,848 (Pension saving of £42,449 less tapered AA)
AA tax charge at marginal rate (assumed to be 40%): £8,739.20 (£21,848 x 40%)

*Taper = £188,799 – £150,000 = £38,799 / 2 = £19,399. Standard AA £40,000 less £19,399 = £20,601

Please note that these examples make no allowance for any carry forward and assume an inflation adjustment of zero. The pension savings in the year are based on the assumption that Trevor and Sinead have no final salary benefits in the LGPS (NI) and that they are not paying any additional contributions.

Examples (under limits for 2020/21 onwards)

Trevor
Gross Salary 2020/21: £220,000
Less employee pension contributions: £23,100 (10.50% of salary)
Threshold Income 2019/20: £196,900 (Below £240,000 so the AA will not be tapered for 2020/21 and remains at £40,000)
Pensions saving in the year: £39,184 (Less than £40,000 so no tax charge)

Emily
Gross Salary 2019/20: £210,000
Less employee pension contributions: £22,050 (10.50% of salary)
Plus taxable income from property: £30,000
Threshold Income 2019/20: £217,950 (Greater than £200,000 so pension savings need added to work out adjusted income)
Plus pensions saving in the year: £50,000
Adjusted Income 2019/20: £267,950 (Greater than £240,000 so AA will be tapered)
Tapered AA: £26,025*
In excess of AA: £23,975 (Pension saving of £50,000 less tapered AA)
AA tax charge at marginal rate (assumed to be 40%): £9,590 (£23,975 x 40%)

*Taper = £267,950 – £240,000 = £27,950/2 = £13,975. Standard AA £40,000 less £13,975 = £26,025

2. Aligning the ‘Pension Input Period’ with the tax year

The ‘pension input period’ (PIP) is the period over which your pension growth is measured. Until 2014/15 the PIP in the LGPS (NI) ran from 1 April to 31 March. From 6 April 2016, PIPs for all pension schemes will be aligned with the tax year – 6 April to 5 April. Special transitional arrangements applied for 2015/16 meaning that there were 2 PIPs in 2015/16, as set out below:

Pre-alignment tax year: 1 April 2015 to 8 July 2015 – the revised AA during this period is £80,000

Post-alignment tax year: 9 July 2015 to 5 April 2016 – the AA for this period is the amount of the £80,000 not used up from the pre-alignment tax year (subject to a maximum of £40,000) together with any carry forward available from the three previous years.

If you have flexibly accessed any benefits in a money purchase pension arrangement on or after 6 April 2015
(see below) you should contact NILGOSC for information about how the pre and post alignment tax years worked as it is different to the above.

Annual Allowance ‘Flexible Benefit’ access

If you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015 then the Money Purchase Annual Allowance (MPAA) rules may apply. However, the MPAA will only apply if your total contributions to a money purchase arrangement in a Pension Input Period exceed the MPAA.

If you have flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, any further contributions you make to a money purchase scheme in subsequent tax years will be tested against the MPAA. If your contributions exceed the MPAA your defined benefit pension (LGPS (NI)) savings will be tested against the alternative AA and you will pay a tax charge in respect of your money purchase saving in excess of the MPAA.

Tax YearMPAAAlternative Annual Allowance if MPAA is exceeded
2016/17£10,000£30,000
2017/18 onwards£4,000£36,000

Special transitional rules applied for the tax year 2015/16 – contact NILGOSC for more information, if applicable.

If you access flexible benefits you will be provided with a flexible access statement; you should provide NILGOSC with a copy of this statement.

Flexible access means taking a cash amount over the tax-free lump sum from a flexi-access drawdown account, taking an uncrystallised funds pension lump sum (UFPLS), purchasing a flexible annuity, taking a scheme pension from a defined contribution scheme with fewer than 12 pensioner members or taking a stand-alone lump sum if you have primary but not enhanced protection².

² A stand-alone lump sum is a lump sum relating to pre 6 April 2006 where the whole amount can be taken as a lump sum without a connected pension

How would I pay an Annual Allowance tax charge?

If you exceed the AA in any year you are responsible for reporting this to HMRC on your self-assessment tax return.

NILGOSC is obliged to notify you if your pension savings in the LGPS (NI) (plus the amount of any Additional Voluntary Contributions (AVCs) you have paid) exceed the standard AA in a year. We must inform you by no later than 6 October of the following tax year. NILGOSC is not obliged to tell you if you have exceeded the tapered AA.

If you have an AA tax charge that is more than £2,000 and your pension savings in the LGPS (NI) alone have increased in the year by more than the AA you may be able to opt for the LGPS (NI) to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits.

If you want the LGPS (NI) to pay some or all of an AA tax charge on your behalf, you must notify NILGOSC no later than 31 July in the year following the end of the year to which the AA charge relates. However, if you are retiring (and take all of your benefits from the LGPS (NI)) and you want the LGPS (NI) to pay some or all of the tax charge on your behalf from your benefits, you must tell us before you become entitled to those benefits.

NILGOSC, at its 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 AA but are in excess of the tapered or money purchase AA, or where part of the charge relates to pension savings outside of the LGPS (NI). You must contact NILGOSC before 31 December of the end of the year in which the tax charge arises if you wish to explore this option (i.e. if the tax charge relates to 2019/20 you must contact us before 31 December 2020).

Am I affected?

If you think you are affected by the AA, more information including an AA checking tool is available on the Government’s website.

This page provides an overview of the AA rules at May 2020. It should not be treated as a complete and authoritative statement of the law. The rules governing AA can be complex and are subject to change; if you are unsure how to proceed you are advised to obtain independent financial advice. For help in choosing an independent financial advisor visit MoneyHelper.

More information

If you have any questions about your LGPS (NI) membership or benefits, please Contact us.