Pensions and Tax

HM Revenue and Customs (HMRC) governs pensions savings. There are currently three main tax allowances for pension savings, an Annual Allowance (AA), a Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). The LSA and LSDBA replace the former Lifetime Allowance with effect from 6 April 2024. The information below provides an overview of the rules governing taxation of pension savings. The rules are complex and can only be summarised here. If you are unsure about the best course of action, it is recommended that you get specialist financial advice and tax guidance as Pension Services staff cannot provide this for you. 
Annual Allowance (AA)

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 all your pension savings in any one year (including pension savings outside of the PPS) are greater than the AA, the excess will be taxed as income.

The AA was set at £40,000 from 6 April 2014 and increased to £60,000 from 6 April 2023.

Most people will not be affected by the AA tax charge because the value of their pension saving 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.

What is tapered annual allowance?

 

The AA is the most you can save in your pension schemes each year with the benefit of tax relief. However, for high earners the AA in a tax year may be reduced or tapered.

The tapered allowance applies to all pension savings that you make or that are made on your behalf.

From 6 April 2023, you'll have a reduced ('tapered') AA if both:

  • your threshold income is over £200,000 (no change from tax year 2022/2023) and
  • your adjusted income is over £260,000 (this was previously £240,000 in the tax year 2022/2023)

You won't be subject to the tapered AA if your threshold income for that year is £200,000 or less, no matter what your adjusted income is.

To see if the taper applies to you, you'll need to work out your:

  • net income in that tax year
  • pension savings in that tax year
  • threshold income in that tax year (broadly defined as your net income for the year)
  • adjusted income in that tax year (including the value of employer pension contributions)

Work out your own tapered annual allowance.

What effect does the tapered annual allowance have?

If you're subject to the tapered AA, for every £2 your adjusted income goes over £260,000, your AA for that year reduces by £1.

From 6 April 2023 the minimum that your AA can reduce to is £10,000.

Don't forget though, that you can also carry forward any unused AA from the previous 3 tax years and use this. Your available AA is your reduced AA plus, any unused allowance from the previous 3 tax years.

What should I do if I've made pension savings over my available annual allowance?

If your pension savings made in the tax year are more than your available AA, you must include the excess the amount on your Self Assessment return.

This amount is added to your taxable income and you will pay Income Tax on it, at the tax rate that applies to you.

Money Purchase Annual Allowance (MPAA)

You may also have benefits in different types of schemes, known as money purchase or defined contribution schemes (e.g. private pensions).

If you have:

  • flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, and
  • paid contributions to a money purchase scheme that exceed the MPAA (below),

then your defined benefit pension savings (e.g. your Police pension) will be tested against the alternative AA limit and you will pay a tax charge in respect of your money purchase savings in excess of the MPAA.

Tax year MPAA Alternative AA if MPAA is exceeded
2021 to 2022 £4,000 £36,000
2022 to 2023 £4,000 £36,000
2023 to 2024 £10,000 £50,000

If you access flexible benefits you will be provided with a flexible access statement. Make sure that you provide us with a copy of this statement.

Lump Sum Allowance (LSA)

The LSA is a limit on the total amount of tax-free cash an individual can take from all their pension savings. It is set at £268,275 and there is no provision in the legislation for this limit to rise. 

Lump Sum and Death Benefit Allowance (LSDBA)

The LSDBA is a limit on the amount of tax free cash that can be taken by an individual and the lump sum death benefits that can be paid in respect of an individual when they die. It is set at £1,073,100 and there is no provision in the legislation for this limit to rise. 

In general
  • Any payments in excess of the LSA or LSDBA will be taxable at the recipient's marginal rate of tax. 
  • The LSA and LSDBA are reduced when the individual has previously used up some or all of their Lifetime Allowance.
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