What is the Annual Allowance?
The annual allowance (AA) is the amount by which the value of your pension benefits may increase in a year without you having to pay a tax charge. This was increased from £40,000 to £60,000 from 6 April 2023.
If the value of your pension savings in a year (including pension savings outside of the LGPS (NI)) is more than the annual allowance, the excess will be taxed as income.
The Government reduced the AA 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. These changes are described under the section on Tapered Annual Allowance.
|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 2023||£40,000 (unless tapering applies)|
|6 April 2023 to 5 April 2024||£60,000 (unless tapering applies)|
Will I 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 £60,000 (2023/24), 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 and receive a significant pay increase. Final salary membership is membership built up in the LGPS (NI) before 1 April 2015.
- 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 you left the Scheme.
- You transfer pension rights into the LGPS (NI) from a previous Northern Ireland public service 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.
- In the past, you transferred in membership from another public service pension scheme 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 have accessed flexible benefits on or after 6 April 2015.
If your LGPS (NI) pension savings exceed the standard AA in any year ending 5 April, NILGOSC will contact you by 6 October to let you know.
The 50/50 section of the LGPS (NI)
If you wish to slow down your pension build-up to avoid or reduce an AA tax charge, you may wish to consider joining the 50/50 section. In the 50/50 section of the LGPS (NI) you pay half your normal contributions and build up half your normal pension, but you retain full life cover 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 (1.3MB, PDF) form.
Before taking 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?
You can calculate your annual allowance using this online annual allowance calculator.
The formula to calculate your increase in value of pension savings over a tax year is:
- [pension value at year-end – (pension value at start of year x CPI Increase)] x 16, plus
- lump sum at year-end – (lump sum at start of year x CPI Increase), plus
- The amount of any AVC contributions made over the year
From 2016/17 the pension saving year begins on the 6 April and ends on the following 5 April.
The CPI increase is the increase in CPI over the 12 months to the September before the start of the tax year. So the CPI increase used for 2022/23 is 3.1% which was the CPI increase in the year to 30 September 2021.
AVC contributions are included as the amount paid during the year and not the difference in AVC fund value.
The assessment for the AA covers any pension benefits you 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 £30,000 in 2021/22 when the AA 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, you would be liable for a tax charge on the amount you exceeded the AA by, even though you did not breach the AA in either scheme
Karen has 10 years’ pensionable service to 31 March 2009, 6 years’ pensionable service to 31 March 2015, and has been in the CARE Scheme since 1st April 2015. Let’s assume Karen earns £30,000 per annum. Karen’s benefits at 5th April 2021 (the end of the 2020/21 pension input period) are:
10 years 0 days x 1/80th x £30,000 = £3,750
6 years 0 days x 1/60th x £30,000 = £3,000
Total CARE to 5 April 2021 = £3,673
Total Pension = £10,423
Total Lump Sum = 10 years 0 days x 3/80th x £30,000 = £11,250
The opening balance for the 2021/22 pension input period takes the pension and lump sum* and increases it by the CPI from the September before the pension input period being measured. The CPI for September 2020 was 0.5%. The opening balance is therefore:
(£10,423 x 16) + £11,250 = £178,018 + 0.5% = £178,908
Karen gets a pay increase to £40,000, starting at the beginning of the 2021/22 pension input period. Karen’s benefits increase to:
10 years 0 days x 1/80th x £40,000 = £5,000
6 years 0 days x 1/60th x £40,000 = £4,000
Total CARE to 5 April 2022 = £4,489.80**
Total Pension = £13,489.80
Total Lump Sum = 10 years 0 days x 3/80th x £40,000 = £15,000
The closing balance for the 2021/22 pension input period is:
(£13,489.80 x 16) + £15,000 = £230,836
The annual allowance is therefore: £230,836 – £178,908 = £51,928. This breaches the standard annual allowance of £40,000. A pension savings statement will be issued to Karen by 6th October 2022
*Lump sum will only be part of the annual allowance calculation if the member holds pre 01/04/2009 pensionable service
**Your CARE pension will be revalued at one second past midnight on 31 March each year. That revaluation is based on the CPI in the 12 months to the September of the pension input period being measured. In the 2021/22 pension input period, revaluation is 3.1% (i.e. CPI at September 2021)
You may be subject to an annual allowance tax charge if the value of your pension savings for a year increases by more than the annual allowance for that year. However, a 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 have to pay an AA tax charge.
If the value of your pension savings in 2021/22 increased by £50,000 (i.e. by £10,000 more than the AA) but in the three previous years had increased by £25,000, £28,000 and £30,000. The amount by which the increase in your pension savings fell short of the AA for those three years (£37,000) would more than offset the £10,000 excess pension saving in the current year. You would not have to pay an AA tax charge.
To carry forward unused AA from an earlier year, you must have been a member of a tax registered pension scheme in that year.
From the tax year 2016/17 onwards, the AA is tapered for high earning individuals. The Finance Act 2004 defines a high earning individual as an individual whose adjusted income is more than £260,000 (23/24 limits). The AA 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 AA is tapered down by £1. Your AA cannot be reduced below the minimum that applies. The limits changed from the 2020/21 year and changed again from the 2023/24 year.
|–||Definition||Limit 2016/17 to 2019/20||Limit in 2020/21 to 2022/23||Limit in 2023/24 onwards|
|Broadly your taxable income after the deduction of your pension contributions (including AVCs deducted under the net pay arrangement)||£110,000
|Broadly your threshold income plus pensions savings built up over the tax year||£150,000
|If your AA is tapered, the minimum AA that can apply||£10,000
Threshold income includes income from all sources that is 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.
From the 2023/24 year, the Taper continues to reduce the AA by £1 for every £2 of adjusted income received by the individual, but to a new adjusted income limit of £260,000. The minimum AA that can be reached is now set at £10,000. This means that from 6 April 2023 the AA for high income individuals is as follows:
|Adjusted Income||Annual Allowance|
|£260,000 or below||£60,000|
|Adjusted Income||Annual Allowance|
|£240,000 or below||£40,000|
|£312,000 or above||£4,000|
|Adjusted Income||Annual Allowance|
|£150,000 or below||£40,000|
|£210,000 or above||£10,000|
Terry earns a gross salary for 2023/24 of £220,000 and his pension contributions are £23,100, 10.5% of his wage. Terry’s threshold income for 2023/24 is (£220,000 – £23,100) = £196,900, this is below £200,000 so the AA will not be tapered for 2023/24 and remains at £60,000. His pension savings for the year are £39,184, this is less than £60,000, so no tax charge applies to Terry.
Emily earns a gross salary of £210,000 in 2023/24 and her pension contributions are £22,050, 10.5% of her wage. Emily also has taxable income from property of £30,000. Emily’s threshold income of £217,950 is greater than £200,000. Her pension savings for the year are £68,571, meaning her adjusted income is £286,521. This is greater than £260,000 so her AA will be tapered, and this is calculated as follows:
£210,000 – £22,050 + £30,000 – £217,950
£217,950 + £68,521 = £286,521
£286,521 – £260,000 = £26,521
£26,521/2 = £13,260
£60,000 – £13,260 = £46,740 (AA for 2023/24)
Pension savings of £68,571 is greater than £46,740. Assuming Emily has no carry forward from the previous three years, and assuming Emily has a marginal tax rate of 45%, Emily’s annual allowance tax charge is calculated as follows:
£68,571 – £46,740 = £21,831
£21,831 * 0.45 = £9,823
Annual Allowance ‘Flexible Benefit’ access
If you have 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. The MPAA will only apply if your total contributions to a money purchase arrangement in a PIP exceed the MPAA.
Generally, if you have flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, any further subsequent contributions you make to a money purchase scheme in the same tax year and any following subsequent tax years will be tested against the MPAA. The MPAA only applies from the day you flexibly access your benefits; no previous savings are affected. 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 Year||MPAA||Alternative annual allowance if MPAA is exceeded|
|2017/18 to 2022/23||£4,000||£36,000|
Special transitional rules applied for the tax year 2015/16 – contact NILGOSC for more information.
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
- 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 protection. 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 must notify you if your pension savings in the LGPS (NI) (plus the amount of any AVCs you have paid) exceed the standard AA in a year, or if we believe you have exceeded the MPAA in a year. We must inform you by no later than the 6 October which follows the end of the Pension Input Period (ends 6 April). NILGOSC is not obliged to inform you if you exceed the tapered annual allowance and NILGOSC is not obliged to calculate your tax charge for you.
If you have an AA tax charge, then you can either pay this to HMRC yourself or in some circumstances you can ask NILGOSC to pay it for you. The tax charge is at your marginal rate of tax.
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 standard AA, you may be able to opt for the LGPS (NI) to pay some or all the tax charge on your behalf. The tax charge would then be recovered from your pension. This is effectively by a negative pension offset (calculated as the tax charge divided by the appropriate factor based on your age and normal pension age) that will be increased each year in line with pension increases. The negative pension offset will be adjusted at retirement to reflect whether you are retiring early or later than your normal pension age.
If you want the LGPS (NI) to pay some or all 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 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 NILGOSC 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. Contact NILGOSC for more information.
You must complete a Scheme Pays Election Form if you would like the LGPS (NI) to pay some or all an AA tax charge on your behalf. You can request this form by contacting the Pensions Development team on 0345 3197 325 or email [email protected].
In order to use mandatory Scheme Pays, you must have a tax charge of £2,000 or more.
Mandatory Scheme Pays allows you to ask NILGOSC to pay the entirety of the tax charge on your behalf, in return for an annual debit on your pension. Voluntary Scheme Pays is offered at NILGOSC’s discretion and certain conditions must be met for voluntary Scheme Pays to be an option.
The calculation methodology for Scheme Pays debits can be found within the Government Actuaries Department (GAD) Annual Allowance Charges: Calculation of Scheme Pays Offset. The factors to calculate Scheme Pays debits are available on our GAD Factors Workbook, at table 601.
Let’s assume William has calculated that he has a tax charge of £5,000, due to excess pension savings. William is 57 at the end of the pension input period and has a normal pension age of 66. The 5th April is deemed to be the ‘relevant date’ for the calculation of Scheme Pays debits, and so we find the factor for an active Scheme member with a normal pension age of 66, who was 57 at the end of the pension input period. The factor is 14.05.
This factor gets divided into the tax charge to calculate the annual debit that is applied to the pension:
£5,000 / 14.05 = £355.87 per annum
This debit increases in line with cost-of-living increases, the same way the member’s pension gets increased, until retirement. It can also be adjusted due to early or late retirement.
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 April 2023. 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.
If you have any questions about your LGPS (NI) membership or benefits, please Contact us.