Pension Tax Relief Limits
Members of UK pension schemes qualify for tax relief as follows:
However, pension benefits which qualify for tax relief are restricted to 2 maximum allowance permitted by HM Revenue & Customs (HMRC).
The Annual Allowance is the total annual limit for the purpose of limiting tax relief and is expressed as a capital value. It measures the increase in the value of pension benefits over a 12 month period, called a Pension Input Period (PIP). The AA is currently £50,000 and reduces to £40,000 with effect from 1 April 2014. Any excess value accrued over the AA limit may be subject to tax at your highest marginal rate. Members who could be potentially impacted by the AA are those who are middle to high earners, particularly those with long service in the scheme, and may be currently paying a high level of AVCs. Those members whose value exceeds the AA, will be provided with a Pension Savings Statement (PSS) for the year(s) when the AA is exceeded. Further information about these statements is available here.
The Lifetime Allowance is the maximum amount of tax relieved pension savings you can build up over a lifetime before any tax penalties apply. You can build up benefits in excess of the limit but benefits over the limit will be subject to a tax recovery charge (currently 25% of pension or 55% if taken as cash). The LTA is currently £1,500,000 and reduces to £1,250,000 with effect from 1 April 2014. Due to the reductions in the LTA, methods of benefit protection have been introduced by HMRC. These protections allow pension scheme members to apply to retain the higher LTA value.
Fixed Protection 2014 (FP2014) features are:
Individual Protection 2014 (IP2014) features are:
It is possible for individuals to apply for both FP2014 and IP2014 although you can't apply for them at the same time, with FP2014 taking precedence. In the event that a pension saver loses FP2014 as a result of future benefit accrual, they can fall back on IP2014.
To help you decide whether to apply for FP2014 and / or IP2014 use the HMRC Lifetime Allowance Checking Tool
Things to consider
Could you be affected by the reduced Lifetime Allowance?
40 years, LTA £1.8m = £146,521 pensionable salary
40 years, LTA £1.5m = £130,434 pensionable salary
40 years, LTA £1.25m = £108,695 pensionable salary
Mitigation of pension tax charges
For the Annual Allowance (AA), HMRC allows “Carry Forward”. This is the mechanism where an individual can carry forward unused annual allowance from three prior years.
For the Lifetime Allowance (LTA), individuals can make use of the above protections for 2014.
USS has 3 tax relief options for members affected by the Annual and/or Lifetime Allowance; further details of these are available on the USS web. USS also has a factsheet explaining what you need to do if your Annual Allowance exceeds the AA limit in any PIP.
Notifying HMRC of a charge payable
This is done via the Self Assessment Tax Return (SATR), the relevant form is the SA101 Additional Information Form, where you provide the amount by which your pension savings exceed the AA value, and on the same form, information on AA tax payable by the pension scheme.
You do not need to make any claim to HMRC to carry forward unused AA amounts, nor do you need to show this on the SATR if your unused allowance means that an AA excess tax charge is not due.
An individual can request that the pension scheme, subject to conditions pays the charge on their behalf and reduce their benefits accordingly. This is known as “Scheme Pays”. The individual must notify the pension scheme that they wish to use “Scheme Pays” by the 31st July in the year following the tax year in which the Annual Allowance charge arose.
Further information available on the pension schemes & HMRCs web:
|USS: Tax Considerations||NHS: Tax Information|
|SAUL: Annual Allowance Lifetime Allowance||MRC Tax Regime|
|Essex Pension Fund: Tax and Pensions||Civil Service: Pensions and Tax|
|HMRC: Pension Schemes – tax relief and charges|
It is acknowledged that some aspects of pensions are complex, and you are presented with difficult decisions to make. UCL Pension Services and the pension schemes are able to provide you with information relating to your pension scheme membership and benefits but cannot provide financial advice.
It is the responsibility for an individual to calculate an AA charge and to report it to HMRC as applicable because this is essentially a personal taxation issue.
It is your responsibility to identify if you have breached the annual allowance limit after taking into account any carry forward allowances, taking into account of any pension savings amount from schemes outside of UCL, and to inform HMRC via the SATR.
Independent Financial Advice
It is recommended that if you need financial advice, you contact an independent financial adviser. particularly if you anticipate that the value of your benefits including those from non-UCL pension arrangements, if any, will be close to or exceed the reduced Lifetime Allowance limit, or if you have issues related to the Annual Allowance/Pension Input Period. Information about where you can obtain Independent Financial Advice is available here and on your pension scheme’s web.
Values since April 2006
CPI used in AA PIP