Guidance on pension tax relief limits: Your Annual Allowance

What is the Annual Allowance?

The Annual Allowance limits the contributions and/or pension benefits that you can build up each year without additional tax charges. If your pension benefits build up by more than your available Annual Allowance (including any carried forward from previous years) the excess is taxed at your marginal rate.

The Annual Allowance for tax years 2011/12, 2012/13 and 2013/14 was £50,000.  The Annual Allowance for 2014/15 reduced to £40,000.  For the 2015/16 tax year the pension input period was adjusted so that it becomes aligned to the tax year from 6 April 2016.  Transitional rules have been brought in for the 2015/16 tax year to make sure that pension savings up to £80,000 made before 9 July 2015 are protected from an Annual Allowance charge.

From 6 April 2016 the Annual Allowance is “tapered”.  The maximum Annual Allowance is £40,000, reducing to £10,000.  See https://www.uss.co.uk/members/members-home/tax-considerations

What does this guidance cover?

The purpose of this guidance is to support and complement the information available on the Finance Division’s Pension website, USS and HMRC websites. This webpage also sets out some additional guidance on how the University’s Pensions Office can assist you, and what information they can obtain for you on pension tax reliefs.

 

It should be noted that an employee is responsible for calculating their own personal Annual Allowance (“AA”) value, as ultimately this is a personal taxation matter.  It is the responsibility of the employee to manage their own allowances and tax position. This is to provide the required notification to HMRC of a potential charge, and for the completion and submission of any HMRC Self Assessment tax return.

 

The Pensions Office will assist and support you by increasing awareness of the issues relating to these tax relief limits and provide you with information on request to enable you to review your personal position.  It is better to be aware of the potential for a tax charge to be incurred and to mitigate this where possible before this point is reached.  In the first instance, you should familiarise yourself with the information available on the dedicated areas of the above websites, where there are various related resources to assist you.  For more in-depth information about the AA, please refer to the HMRC website.

Who is most likely to be affected?

  • Those with higher salaries
  • Those with long service
  • Those with other pension arrangements, including added years
  • Those who have already used previous years' allowances

What can you do if you are likely to exceed the AA?

For many who exceed the AA because of a spike in salary, the carry forward rules may be useful.  This is a mechanism where you are able to offset any unused allowance from up to three previous scheme years against your excess pension savings.  This is likely to be the solution for many members who have any unused previous years’ allowances to reduce or eliminate a tax charge, particularly for those who have not exceeded the limit in previous years but experience a one-off spike in the AA as a result of a promotion / increase in pensionable salary.

Because of the complexity, the carry forward calculations for the three previous years before 2016/17 have to be provided by USS.  You can request AA calculations from USS for the previous three years by emailing the USS team in the Pensions Office.

USS Money Purchase (Prudential) AVCs (MPAVCs) and (from October 2016) 1% match contributions or USS Investment Builder AVCs:  If you currently pay these, you may wish to consider reducing or ceasing these payments for the remainder of the current tax year, and then consider if it is appropriate to resume in subsequent tax years.  If you decide to reduce or cease your MPAVCs or discuss the level of contributions, you will need to contact Prudential directly - call the customer call centre on 0845 600 0343.

If, after considering the actions and options available to you, including those above, and it is identified there is a potential AA charge, as you are likely to exceed the AA limit in the current year, there are other options below to consider.

What options are there to mitigate any tax?

If carry forward is not sufficient, there are a number of options to adjust your benefits from USS.

USS tax relief options:  These were introduced to assist members who may have or are likely to have an AA or Lifetime Allowance charge.  Find out more about these options here.

If, after weighing up the choices and USS options available, and after taking obtaining financial advice, it is concluded you need to choose one of the options available from USS, you should proceed as follows:

  1. Making an election for one of the USS tax relief options: An election form (separate form for each of the tax relief limits options) can be downloaded directly from the USS website, noting that USS requires 28 days notice in writing before the date of the election. All completed Election Forms should be sent to the Pensions Office, not to USS directly.
  2. Pay the charge: If, after considering all the actions and options available to you it is identified that you have an AA tax charge, this has to be notified to HMRC by completion of a self-assessment tax return. This is regardless of whether you normally complete a tax return or not. Further information about how you inform HMRC is available on the HMRC website.
  3. Scheme Pays: If the tax charge is above £2,000 and the total amount of your pension savings in the pension year for the same tax year has exceeded the AA, you can choose to have some or all of your AA charge paid by USS. There will be a reduction to the value of your USS benefits at retirement in exchange for the payment of the tax charge. The USS website has a factsheet about Scheme Pays. Further information about the Annual Allowance and the Scheme Pays option is available at the HMRC website.
  4. University Option: The University has a pension cash supplement option for those adversely affected by pension tax allowances, subject to certain criteria.

Will USS let me know if I am over the AA?

USS will supply a statement to members with benefits over the AA by 6 October each year.

What are the limits?

  • The Lifetime Allowance (LTA) is £1.0m with effect from 6 April 2016 (down from £1.25m in 2015/16).

The Government has restricted pension tax relief for high earners by introducing a tapered reduction in the amount of AA for individuals with income (including the value of any pension contributions) of over £150,000, and who have an income (excluding pension contributions) in excess of £110,000.  For more information please visit the HMRC site.

How can the Pensions office help?

The University Pensions Office can explain the background to pension taxation and explain information provided by USS. We cannot give you advice or help with tax planning. For this you may want to consult your accountant, or an independent financial adviser.