Pension tax changes – overview
The tax relief applicable to pensions has changed a number of times since 2010/11.
HM Revenue & Customs provide guidance for individuals on the HMRC website
You should consider matters carefully before making any decisions and may wish to consult an independent financial adviser for advice.
Nothing in this communication should be interpreted as constituting financial advice. You should obtain independent advice on any specific issues concerning you.
Annual Allowance – Currently £40,000
The Annual Allowance sets the maximum amount of pension saving 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
- getting a promotion that includes a significant pay rise
- leaving on ill health retirement with an enhancement to your service (please see separate fact sheet on this specific issue - Impact of Annual Allowance on ill health retirement)
- 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, eg 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.
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.
Changes to 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. Initially the ‘threshold income’ limit was set at £110,000 and the ‘adjusted income’ limit was set at £150,000, potentially decreasing the members personal Annual Allowance to a minimum of £10,000. However from April 2020 these limits were changed, meaning that members with a ‘threshold income’ greater than £200,000 and an ‘adjusted income’ greater than £240,000 within any tax year will have their Annual Allowance for that tax year restricted. For every £2 of adjusted income they have over £240,000, their Annual Allowance is reduced by £1 to a minimum of £4,000.
The maximum reduction to the annual allowance will be £36,000, so that anyone with adjusted income of or above £312,000 will have an annual allowance of £4,000.
As is the case at present, any unused annual allowance from the three previous tax years will be able to 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 & Customs provide further guidance on tapered annual allowance and the definitions of “adjusted income” and “threshold income” on the HMRC website.
Following the change in 2020, 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 – £1,073,100 from 6 April 2020.
From 6 April 2020, the Lifetime Allowance has been set at £1,073,100 and will remain at this level until April 2026.
To calculate the value of your pension for Lifetime Allowance purposes, multiply the annual payment by 20, and add any lump sum which is an automatic entitlement. This will mean potential tax bills for some people retiring with a pension of £53,655 or more (premium, nuvos or alpha) or £46,657 (plus lump sum) for members of classic.
For further information regarding the LTA please go to the HMRC website.
You should consider matters carefully and may wish to consult an independent financial adviser.
Further information regarding pensions and tax
Occupational pension schemes and personal pension arrangements which benefit from tax relief are subject to tax rules. The rules limit the amount of tax relief given to pensions. See the publication called Your pension and tax - How the tax rules may affect you.
Pension schemes relief at source for Scottish Income Tax - Newsletter February 2018.
The Scottish Parliament agreed Scottish Income Tax rates and bands for the 2018 to 2019 tax year. See the Pension schemes relief at source for Scottish Income Tax newsletter.