Overview
In this section we look at the HM Revenue and Customs (HMRC) rules about pension savings. There are limits on:
- the amount of pension savings you can make in a year, and
- the total amount of pension savings you can have in all pension schemes
before you have to pay extra tax. These are called the annual allowance and the lifetime allowance. This is in addition to any income tax you pay on your pension when it is paid to you. Most people will be able to save as much as they wish because their pension savings are less than the allowances.
The Government has confirmed that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date it is still payable. The lifetime allowance will be abolished completely from 6 April 2024.
There is no limit on the amount of pension contributions you can pay. You will not get tax relief on all your contributions if you pay more than your taxable pay into your pension in a tax year.
There is a limit on the amount of extra pension you can buy in the LGPS by paying additional pension contributions. The most you can currently buy is £7,579 of extra yearly pension.
Back to topBack to content menuThe annual allowance
The annual allowance is the amount your pension savings can increase by in a year without you having to pay extra tax. If your savings increase by more than the annual allowance, you will have to pay tax on the excess. The standard annual allowance increased from £40,000 to £60,000 on 6 April 2023.
Your annual allowance 03:22
Tax rules limit how much pension you can build up each year without having to pay a tax charge. This video explains how the annual allowance works.
Download transcript for “Your annual allowance”Visit the Videos page to watch more of our ‘Pensions made simple’ videos, including Welsh language versions.
Who is affected by the annual allowance?
Most people aren’t affected by the annual allowance because their pension savings don’t increase by more than £40,000 (£60,000 from the tax year 2023/24) in a year. You are most likely to be affected if one or more of these statements applies to you:
- You have membership in the final salary section and you receive a significant pay increase. Membership built up before 1 April 2014 is final salary membership. You could also have membership in the final salary section that you transferred from another public service pension scheme.
- You combine a previous LGPS pension benefit that was built up in the final salary section of the LGPS and your salary is higher than it was when you left the Scheme.
- You transfer pension rights that include final salary benefits into the LGPS from another public service pension scheme and your current salary is higher than your salary was when you left the other pension scheme.
- You pay a high level of additional contributions.
- You are a high earner.
- You have accessed flexible benefits since April 2015.
How is the annual allowance worked out?
The increase in the value of your LGPS benefits in a year is calculated by:
- working out the value of your benefits before the start of the ‘pension input period’
- increasing that amount by inflation
- comparing it with the value of your benefits at the end of the ‘pension input period’
- adding any Additional Voluntary Contributions (AVCs) that you or your employer has paid during the year.
The pension input period is the same as the tax year – 6 April to 5 April.
The value of your LGPS benefits is:
- your annual pension multiplied by 16 plus
- any lump sum you are automatically entitled to. You will have an automatic lump sum if you joined the LGPS before 1 April 2008.
If the value of your pension benefits at the end of the year less their value before the start of the year is more than the annual allowance, you may have to pay a tax charge.
The annual allowance applies to all pension schemes, not just the LGPS. If you pay into more than one pension scheme in a year, you will need to find out the total increase in pension savings across all schemes to find out if you have exceeded the annual allowance.
You can use the Annual allowance quick check tool to check if your LGPS pension savings are likely to exceed the annual allowance.
Carry forward
The carry forward rule allows you to carry forward unused annual allowance from the three previous years. This means that you may not have to pay an annual allowance tax charge, even if the value of your pension savings increases by more than the annual allowance in a year. To carry forward unused annual allowance from an earlier year, you must have been a member of a tax-registered pension scheme in that year.
The tapered annual allowance for high earners
The annual allowance is reduced or ‘tapered’ for higher earners. The annual allowance 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 annual allowance is reduced by £1. Your annual allowance cannot be reduced below the minimum. These limits changed from April 2020 and then again from April 2023. The table below shows the limits that apply.
| Term | Definition | Limit 2016/17 to 2019/20 | Limit 2020/21 to 2022/23 | Limit 2023/24 onwards |
|---|---|---|---|---|
| Threshold income | Broadly, your taxable income after your pension contributions have been deducted (including AVCs deducted under the net pay arrangement | £110,000 | £200,000 | £200,000 |
| Adjusted income | Broadly, your threshold income plus pension savings built up in the tax year | £150,000 | £240,000 | £260,000 |
| Minimum annual allowance | The minimum annual allowance that can apply | £10,000 | £4,000 | £10,000 |
Flexible benefit access and the annual allowance
If you have benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed since 6 April 2015, then the money purchase annual allowance rules may apply. This will only be the case if your total contributions to a money purchase arrangement exceed the money purchase annual allowance in a year.
If your contributions exceed the money purchase annual allowance, your pension savings in the LGPS will be measured against the alternative annual allowance.
| Tax year | Money purchase annual allowance (MPAA) | Alternative annual allowance if MPAA exceeded |
|---|---|---|
| 2016/17 | £10,000 | £30,000 |
| 2017/18 to 2022/23 | £4,000 | £36,000 |
| 2023/24 onwards | £10,000 | £50,000 |
If you access flexible benefits, your pension scheme must give you a flexible access statement. You should give your LGPS pension fund a copy of this statement.
Exceeding the annual allowance
Your pension fund must tell you if your pensions savings in the LGPS exceed the annual allowance in a tax year. They must inform you within six months of the end of the tax year – by 6 October. Your pension fund is not required to tell you if you have exceeded the tapered annual allowance.
If you exceed the annual allowance in a year, you must report this to HMRC in your self-assessment tax return.
If you have an annual allowance tax charge that is more than £2,000, you may be able to opt for the LGPS to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension. This is known as ‘scheme pays’. If you are retiring, you must elect for scheme pays before you take your pension. Contact your pension fund to find out more about scheme pays and the time limits that apply.
If you wish to slow down your pension build-up, you may wish to consider joining the 50/50 section. In the 50/50 section you pay half your normal contributions and build up pension at half the normal rate. You retain full life cover and ill health cover. You can find out more about 50/50 in the Paying less section.
If you opt out of the LGPS with a right to a deferred benefit, you will not be able to combine those benefits with your new pension if you re-join the LGPS.
Before taking any action to reduce your tax liabilities you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser - This link opens in a new browser window.
Back to topBack to content menuAnnual allowance examples
Annual allowance example 1 – Sanjay
This example shows Sanjay’s annual allowance position for the 2019/2020 year. This example demonstrates the lower annual allowance tapering limits that were in force before the 2020/21 year.
| Sanjay’s financial information | Amount |
|---|---|
| Gross salary 2019/20 | £130,000 |
| Less employee pension contributions (11.4%) | £14,820 |
| Plus taxable income from property | £30,000 |
| Threshold income 2019/20 | £145,180 |
| Plus pension savings in the year | £42,449 |
| Adjusted income 2019/20 | £187,620 |
Sanjay’s Threshold income is more than £110,000 and his Adjusted income is more than £150,000. His annual allowance is tapered for the 2019/20 year
| Sanjay’s financial information | Amount |
|---|---|
| Tapered annual allowance | £21,186* |
| In excess of annual allowance | £21,263 (£42,449 – £21,186) |
| Annual allowance tax charge at marginal rate | £8,505.20 (40% rate assumed) |
* Taper = £187,629 – £150,000 = £37,629 ÷ 2 = £18,814 (rounded down)
Standard annual allowance £40,000 – £18,814 = tapered annual allowance £21,186
Annual allowance example 2 – Cerys
Cerys is a higher earner who exceeds the standard annual allowance in the 2020/21 year.
| Cerys’s financial information | Amount |
|---|---|
| Gross salary 2020/21 | £220,000 |
| Less employee pension contributions (12.5%) | £27,500 |
| Threshold income 2020/21 | £192,500 |
Cerys’s Threshold income is less than £200,000. Her annual allowance will not be tapered in 2020/21. Cerys’s pension savings will be measured against the standard annual allowance of £40,000.
| Cerys’s financial information | Amount |
|---|---|
| Pension savings in 2020/21 | £71,837 |
| Standard annual allowance | £40,000 |
| Pension savings in excess of annual allowance | £31,837 |
| Annual allowance tax charge at marginal rate | £14,327 (45% rate assumed) |
Annual allowance example 3 – Huang
In this example, Huang exceeds the increased tapered annual allowance limits that apply from the 2020/21 year.
| Huang’s financial information | Amount |
|---|---|
| Gross salary 2020/21 | £210,000 |
| Less employee pension contributions (12.5%) | £26,250 |
| Plus taxable income from property | £30,000 |
| Threshold income 2020/21 | £213,750 |
| Plus pension savings in the year | £68,571 |
| Adjusted income 2020/21 | £282,321 |
Huang’s Threshold income is more than £200,000 and her Adjusted income is more than £240,000. Her annual allowance will be tapered for the 2020/21 year.
| Huang’s financial information | Amount |
|---|---|
| Tapered annual allowance | £18,840* |
| In excess of annual allowance | £49,731 |
| AA tax charge at marginal rate | £22,379 (45% rate assumed) |
* Taper = £282,321 – £240,000 = £42,321 ÷ 2 = £21,160 (rounded down)
Standard annual allowance £40,000 – £21,160 = £18,840.
Annual allowance examples – assumptions
We have made no allowance for any carry forward in these examples. In working out the pension savings in the year we have assumed:
- inflation adjustment of zero
- the members have no final salary benefits in the LGPS, and
- the members are not paying any additional contributions.
The lifetime allowance
The Government has recently announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance will be abolished completely from 6 April 2024.
Before 6 April 2023, if the value of your pension benefits when you took them was more than the lifetime allowance, or more than any protections you held, you had to pay tax on the excess benefits. This did not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to..
The lifetime allowance covered any pension benefits you had in all tax-registered pension arrangements – not just the LGPS.
Your lifetime allowance 02:56
Tax rules limit how much pension you can build up over your lifetime without having to pay a tax charge. This video explains how the lifetime allowance works.
Download transcript for “Your lifetime allowance”Visit the Videos page to watch more of our ‘Pensions made simple videos, including Welsh language versions.
The lifetime allowance has changed a number of times since 2011. The Government has announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance will be abolished completely from 6 April 2024.
| Tax year | Lifetime allowance |
|---|---|
| 2011/12 | £1.8 million |
| 2012/13 | £1.5 million |
| 2013/14 | £1.5 million |
| 2014/15 | £1.25 million |
| 2015/16 | £1.25 million |
| 2016/17 | £1 million |
| 2017/18 | £1 million |
| 2018/19 | £1.03 million |
| 2019/20 | £1,055,000 |
| 2020/21 to 2023/24 | £1,073,100 |
How is the lifetime allowance calculated?
Each time you take payment of a pension benefit, the capital value of the benefits you are taking uses up a percentage of your lifetime allowance. Even if your pensions are small, you should keep a record of every pension you receive.
The capital value of pensions that you take after 5 April 2006 is your annual pension multiplied by 20, plus any lump sum you take from the pension scheme. If you have a pension that was first paid before 6 April 2006, this will also be treated as using up part of your lifetime allowance. For these pensions, the capital value is the current annual pension multiplied by 25. Any lump sum you received is ignored.
Before 6 April 2023, when you took your benefits, if the capital value of those benefits was more than your available lifetime allowance, you had to pay tax on the excess. If your excess benefits were paid as a pension, the tax charge was 25% of the excess. The ongoing pension payments were also subject to income tax. If you took the excess benefits as a lump sum, they were taxed once at 55%.
You could choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or ask the scheme to pay the tax for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit.
Changes to the lifetime allowance
The lifetime allowance reduced from £1.25 million to £1 million in 2016. The Government introduced two protections called Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced in 2014.
The Government has announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. The lifetime allowance will be abolished completely from 6 April 2024.
Individual Protection 2016
You can apply for Individual Protection 2016 if the value of your pension savings on 5 April 2016 was more than £1 million. You can’t apply if you have Primary Protection.
Individual Protection 2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016, up to a maximum of £1.25 million. Before 6 April 2023, you had to pay tax on any pension savings in excess of your protected lifetime allowance.
Fixed protection 2016
You can apply for Fixed Protection 2016 if you expect your pension savings to be more than £1 million when you take them after 6 April 2016. With Fixed Protection 2016, your lifetime allowance is fixed at £1.25 million.
Before 6 April 2023, you would lose Fixed Protection 2016 if your benefits increased by more than the cost of living in any tax year. The cost of living increase in 2016/17 was zero, which meant you could only hold Fixed Protection 2016 if your LGPS membership ended before 6 April 2016. If you remained a member after 6 April 2016, you would have lost this protection.
You would also have lost Fixed Protection if you:
- started a new pension arrangement, other than to accept a transfer of existing pension rights
- paid into a money purchase pension arrangement, other than to a life assurance policy that you started before 6 April 2006
- transferred your pension, except in limited circumstances.
From 6 April 2023, if you hold a valid fixed protection certificate, you will be allowed to build up new pension benefits, join a new pension arrangement, or transfer without losing your protection, as long as you applied for the protection before 15 March 2023.
If you apply for Fixed Protection on or after 15 March 2023, the rules about losing it set out above still apply.
If you lose Fixed Protection, you must let HMRC know within 90 days of the date you could first reasonably be expected to have known about the loss.
You can’t have Fixed Protection 2016 of you already have Primary or Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014.
Applying for Fixed and Individual Protection 2016
You can still apply to protect your pension lifetime allowance - This link opens in a new browser window by applying to HMRC for Fixed or Individual Protection 2016. There is no deadline for making an application. However, you will need to inform HMRC of the value of your pension savings on 5 April 2016 to apply for Individual Protection 2016. Your pension administrator was only obliged to provide you with this information up to 5 April 2020.
Although the lifetime allowance tax charge will not apply from 6 April 2023, holding a protection may still allow you take a larger tax-free lump sum.
If you successfully apply for protection, the online service will provide you with a reference number that you must keep. You must apply before you take your pension as you will need to give your pension administrator this reference.
Other protections
When the Government introduced the lifetime allowance in 2006, and when it reduced in 2012 and 2014, it introduced protections for members with large pension pots. If you have applied for a previous protection such as Enhanced Protection, Primary Protection, Fixed Protection 2012 or 2014, or Individual Protection 2014, you should have received a certificate to confirm your protection.
Before 6 April 2023, you may still have been subject to a lifetime allowance charge if your pension exceeded your protected amount or if you lost your protection.
You can find out more about Tax on your private pension contributions - This link opens in a new browser window, these protections and when you may lose them on the Government website.
Taking a tax-free lump sum
The maximum tax-free lump sum you can have when you take your pension is the lower of:
- 25% of the capital value of your LGPS pension
- 25% of your remaining lifetime allowance.
The standard lifetime allowance in 2023/24 is £1,073,100 and 25% of this amount is £268,275. The Government has announced that the no one will pay a lifetime tax charge from 6 April 2023; however, the maximum lump will still be based on 25% of the standard lifetime allowance.
If you have already taken pension benefits from any UK pension scheme, you have used up some of your lifetime allowance. The maximum lump sum you can take is 25% of your remaining lifetime allowance.
If you hold a valid lifetime allowance protection, you may be able to take a lump sum that is larger than £268,275 as long as the lump sum does not exceed 25% of your remaining lifetime allowance.
Back to topBack to content menuLifetime allowance – examples
Lifetime allowance example 1 – Sarah
Sarah retires on 31 May 2021. she has not taken any pension benefits previously.
| Sarah’s financial information | Amount |
|---|---|
| LGPS annual pension | £25,000 |
| LGPS lump sum | £45,000 |
| AVC taken as a lump sum | £116,375 |
| Capital value of LGPS benefits | £661,375* |
* The capital value is (20 × £25,000) + £45,000 + £116,375
The capital value of Sarah’s benefits is less than the lifetime allowance for 2021/22 of £1,073,100.
She has used 61.63% of the available lifetime allowance.
Lifetime allowance example 2 – Patrick
Patrick retires on 31 January 2022. He has not taken any pension benefits previously and he has not applied for any lifetime allowance protection.
| Patrick’s financial information | Amount |
|---|---|
| LGPS annual pension | £50,000 |
| LGPS lump sum | £120,000 |
| Capital value of benefits (20 × £50,000) + £120,000 | £1,120,000 |
| Excess over lifetime allowance of £1,073,100 | £46,900 |
| Tax charge payable on excess | £15,477* |
* Patrick opted to be paid the benefits in excess of the lifetime allowance as a lump sum. Tax on the lump sum is charged at 55%.
The tax payable is £46,900 ÷ 20 × 12 × 55% = £15,477.
Patrick has used 100% of the available lifetime allowance.
Back to topBack to content menuFind out more
- Tax on your private pension contributions from Gov.uk
- Information from MoneyHelper on Choosing a financial adviser
- Paying less – the 50/50 section
- Transferring in
- Taking a lump sum