The annual allowance 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.
From the tax year 2016/2017 the pension savings year for all pension schemes runs from 6 April to 5 April; this is called the pension input period. Prior to the tax year 2016/2017 the pension savings year in the LGPS ran from 1 April to 31 March.
The annual allowance limit since 2011/12 is set out in the following table:
| Year | Annual allowance limit |
|---|---|
| 2011/12 | £50,000 |
| 2012/13 | £50,000 |
| 2013/14 | £50,000 |
| 2014/15 | £40,000 |
| 2015/16 | £80,000 (transitional rules applied) |
| 2016/17 | £40,000 |
| 2017/18 | £40,000 |
| 2018/19 | £40,000 |
| 2019/20 | £40,000 |
| 2020/21 | £40,000 |
| 2021/22 | £40,000 |
| 2022/23 | £40,000 |
| 2023/24 | £60,000 |
Generally, assessing your pension growth for the annual allowance covers any pension benefits you may have in all tax-registered pension arrangements where you have been an active member of the scheme during the tax year. Meaning you have paid contributions during the tax year (or your employer has paid contributions on your behalf).
You would only be subject to an annual allowance tax charge if the growth of your pension in a tax year, increases by more than the annual allowance for that tax year. Or if you are subject to the tapered annual allowance (a reduced allowance if you currently earn more than £200,000),
However, a three year carry forward rule allows you to use earlier unused annual allowance from the previous three tax years. This means that even if the growth in your pension is more than the annual allowance in a year, you may not be liable for an annual allowance tax charge.
For example, if the growth in your pension in 2022/23 was calculated as £50,000 (£10,000 more than the annual allowance) but in the three previous years was £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of the annual allowance (£40,000) for those three years would more than offset the £10,000 excess pension growth in the current year. There would be no annual allowance tax charge to pay in this case. 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.
Most people will not be affected by the annual allowance tax charge because the growth in the pension will not increase in a tax year by more than the annual allowance limit. But if it does, they are likely to have unused allowance from previous tax years that can be carried forward.
If, however, you are affected you will be liable to a tax charge (at your marginal rate). This will apply on the amount by which the value of your pension savings for the tax year, less any unused allowance from the previous three years, exceeds the annual allowance.
We will inform you if you exceed the annual allowance in any given tax year. You’ll be notified no later than 6 October, following the end of the relevant tax year.
Special rules apply if you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015. Or if you are a higher earner to whom the 'tapered annual allowance' applies.
More detailed information and examples of how annual allowance is calculated can be found in the Pensions Taxation - Annual Allowance (PDF, 230KB)
You can use the Annual Allowance Quick Check tool to check your amount of Annual Allowance used from 2016/17 onwards.
Annual Allowance 'Scheme Pays'
There are certain circumstance where the scheme can pay if you exceed your Annual Allowance. More details can be found in the factsheet Pension Taxation - Annual Allowance 'Scheme Pays' (PDF, 137.14KB)
HM Revenue and Customs (HMRC) annual allowance guidance:
If your pension savings are more than your annual allowance, HMRC provide guidance on carrying forward unused annual allowances from previous years.
Check if you have unused annual allowances on your pension savings
If you are affected by the tapered annual allowance, HMRC provide guidance to help you work out how much annual allowance you get for your pension growth from 2016 onwards.
Work out your reduced (tapered) annual allowance
Find out when your pension scheme must pay some or all of the annual allowance tax charge for you and when they can choose to do so.
Who must pay the pensions annual allowance tax charge
If you have exceeded your annual allowance and you do not have sufficient carry forward from previous years to cover the excess, you must declare this on your self-assessment tax return. Even if the pension scheme are paying the tax charge on your behalf. The Pension savings — tax charges (Self Assessment helpsheet HS345) has specific information on declaring the annual allowance charge on your self-assessment return.