Pensions and tax

Overview

HM Revenue & Customs (HMRC) sets limits on the amount of pension savings that can be built up each year without incurring additional tax charges.

There have been many changes to tax limits in recent years. More information on the limits and allowances can be found below and on the HMRC website.

Nothing in this communication should be interpreted as constituting financial advice. You should obtain independent advice on any specific issues concerning you.

Annual Allowance - £60,000 (from 6 April 2023)

The Annual Allowance sets the maximum amount of pension savings that you can build up in any one year before incurring a tax charge. This includes actual employer and employee contributions to defined contribution schemes (such as an AVC scheme or Partnership), as well as benefits built up in defined benefit schemes such as Classic, Classic Plus, Premium, Nuvos and alpha.

Annual allowance is worked out as 16 times the increase in the value of your pension during the year, plus the increase in value of any automatic lump sum (Classic/Classic Plus only). A measure for inflation is included in the calculation.

Please be aware that this doesn’t just affect high earners. Any of the following actions or processes could also have an impact on the amount of annual allowance you use:

• buying added pension (especially lump sum purchases)
• contributing towards other pensions savings such as AVCs
• a significant increase in pensionable pay, for example through promotion, temporary promotion, a pay award, where more than one pay award is received in the same tax year 
• leaving on ill health retirement with an enhancement to your service 
• transferring in service from another pension scheme under the preferential Club Transfer terms
• aggregating or linking a previous period of employment from the Civil Service

If you have breached the annual allowance due to your Northern Ireland Civil Service (NICS) pension alone (not including any Defined Contribution AVCs you may be making) you will receive a pension savings statement.

Please be aware that if you are making other pension contributions, e.g. to a personal pension, it is your responsibility to assess whether you have breached the annual allowance limit across all your pension contributions.

You will not receive a pension savings statement unless you have breached the limit in the NICS pension alone or you have requested a statement.

Carry Forward – unused Annual Allowance

If you have unused annual allowance from the previous three tax years, you may be able to carry it forward and add it to your annual allowance for the current tax year. This can help offset a higher pension saving amount in the current year and potentially reduce or avoid an annual allowance tax charge. The current year's annual allowance must be used first, with any unused allowance from earlier years used in order, starting with the oldest tax year.

Scheme Pays

If you do incur an annual allowance tax bill in relation to your NICS pension and it is more than £2,000, then you will have the option of requesting to use the Scheme Pays facility. Scheme Pays is where the pension scheme will pay an amount of tax for you in exchange for a permanent reduction to your pension. Contact Civil Service Pensions if you do wish to use Scheme Pays.

Further Information on Annual Allowance

Aligning pension input periods

As from 6 April 2016, the amount of your annual allowance for a tax year will be restricted if you have income of over £150,000 for that tax year. To ensure the measure works as intended it is necessary to align pension input periods with the tax year.

For NICS Pensions the pension input period had been 1 January to 31 December. You will have two pension input periods for 2015/16 these will be 1 January 2015 – 8 July 2015 and 8 July 2015 – 5 April 2016.

Some individuals may have put in pension savings of more than £40,000 prior to the Budget, on the expectation that these savings would be tested against the annual allowance for tax years 2015 to 2016 and 2016 to 2017 but which will now be only tested against the annual allowance for 2015 to 2016. Transitional rules were introduced to ensure that in these circumstances pre-Budget savings of up to £80,000 are protected from an annual allowance charge.

Tapered annual allowance

From April 2016 the government introduced Tapered Annual Allowance. This is triggered when both the ‘threshold income’ and ‘adjusted income’ exceed their designated limits. These limits were subsequently changed April 2020 and again from April 2023, alongside the increase in Annual Allowance limit. The limits for each period can be seen below:

Dates affected	Annual Allowance	Threshold Income	Adjusted Income	Minimum tapered Annual Allowance
From April 2016	£40,000	£110,000	£150,000	£10,000
From April 2020	£40,000	£200,000	£240,000	£4,000
From April 2023	£60,000	£200,000	£260,000	£10,000

For every £2 of income you have over adjusted income, your Annual Allowance is reduced by £1 to the stated minimum.

Currently, the maximum deduction to the Annual Allowance is £50,000, so that anyone with an adjusted income of or above £360,000 will have an annual allowance of £10,000.

Any unused annual allowance from the three previous tax years can be carried forward and added to the individual’s annual allowance. Where this annual allowance is reduced by the taper, the carry forward will be the balance of the tapered amount.

HM Revenue and Customs provide further guidance on tapered annual allowance and the definitions of “adjusted income” and “threshold income” on their website.

Following the change in 2020 and 2023, it is unlikely that a member will exceed the limits unless they have other factors such as an external taxable income. If you think you may be affected we suggest that you seek the assistance of an Independent Financial Advisor.

Lifetime Allowance 

Lifetime Allowance (LTA) was a limit on the total value of pension savings that could benefit from UK tax relief. If the value of an individual's pension benefits exceeded the allowance when they were accessed, additional tax charges could apply. Prior to its abolition, the standard LTA was £1,073,100. 

Lump Sum Allowance and Lump Sum and Death Benefit Allowance 

From 6 April 2024, the Government abolished and replaced the Lifetime Allowance (LTA) with two new allowances. Background to the measure can be found at Background to the measure can be found at the HMRC website.

The two new allowances are:

	Description	Limit
Lump Sum Allowance (LSA)	The total amount of tax-free cash an individual member can receive across all pension schemes at retirement.	£268,275*
Lump Sum and Death Benefit Allowance (LSDBA)	The overall limit on the amount of tax-free money paid out during an individual’s lifetime.	£1,073,100*

*If you have Lifetime Allowance protection, or you have applied to HM Revenue & Customs for a protected allowance, you may be entitled to a larger amount More information can be found below.

If you have previously taken benefits from the scheme and need to provide another pension scheme with a ‘Transitional Tax-Free Amount Certificate’, more information and how to apply can be found below:

Lump sums benefits paid before April 2024

Any lump sum benefits paid before 6 April 2024 count towards these new allowances. If any lump sum you wish to take exceeds your available LSA or LSDBA, we may need to limit the amount of lump sum we can pay you. If this happens, we will contact you to let you know your options.

If you have previously taken benefits from the scheme and need to provide another pension scheme with a ‘Transitional Tax-Free Amount Certificate’, more information and how to apply can be found below:

Transitional Tax-Free Amount Certificates Hub

What you will need to do when applying for your pension benefits.

We will send you a Personal Details Form to complete. If you answer ‘Yes’ to any of the HMRC questions, you must provide the supporting information requested so we can work out how much of your allowances you have already used and how much you have remaining. If you have pensions with other providers, you will need to contact them to obtain this information.

The Pension Scheme Tax Reference (PSTR) for Northern Ireland Civil Service Pensions Schemes

The Pension Scheme Tax Reference (PSTR) is different for each scheme. If you are using Scheme Pays for both schemes, then you will need to inform HMRC of both PSTRs.

• for the Principal Civil Service Pension Scheme (Northern Ireland), it is 00329686RF
• for the alpha pension scheme, it is 00820865RA

Independent Financial Advice

Civil Service Pensions cannot offer financial advice.

However, MoneyHelper have pension specialists where members can get free advice without having to pay an Independent financial Advisor, but if you do need a financial advisor MoneyHelper have a tool to locate Financial Conduct Authority regulated Financial Advisors in any area under their “Find a retirement adviser” link.

Their website is at: https://www.moneyhelper.org.uk/en

Further information 

If you require more information please contact us.