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Annual Allowance and Lifetime Allowance
Standard employee contributions and any Additional Voluntary Contributions (AVCs) to a UK pension scheme attract tax relief at your highest marginal rate of income tax.
When you retire and take your retirement benefits, you can take part of those benefits as a tax-free lump sum. However, your pension income is taxed as earned income under Pay As You Earn (PAYE).
The Lifetime Allowance tax charge was removed with effect from 6 April 2023. The Lifetime Allowance will be abolished from 6 April 2024 but pension tax free lump sums will remain restricted to 25% of the current lifetime allowance. If you have Individual, Fixed, Primary or Enhanced Protection then the amount of tax free cash that you can access is limited to 25% of your protection.
In conjunction with the changes to the Lifetime Allowance, the Annual Allowance increased to £60,000 and the Money Purchase Annual Allowance increases to £10,000 with effect from 6 April 2023.
Pension Savings Statement
The pension schemes will release a Pensions Saving Statement if the scheme estimate that you have exceeded the Annual Allowance in a tax year. The regulatory deadline for a scheme to produce a Pensions Saving Statement is the beginning of October following the end of the applicable tax year.
Mitigation of pension tax charges (Carry Forward and Individual Protection 2016)
Unused Annual Allowance from the previous 3 tax years can be carried forward to mitigate an Annual Allowance Tax Charge.
You do not need to notify the HMRC if the unused Annual Allowance from the previous 3 years fully mitigates a tax charge.
Lifetime Allowance funds from £1 million to £1.25 million as at 6 April 2016 can be protected by applying for Individual Protection 2016.
Notifying HMRC of a tax charge payable
You can notify the HMRC of a tax charge payable via a Self Assessment Tax Return (SATR). The amount payable should be included in the HMRC SA101 Additional Information Form.
Scheme Pays
If the Annual Allowance Tax Charge is more than £2,000 an individual can elect for the Pension Scheme to pay an Annual Allowance tax Charge via Scheme Pays.
Your responsibilities
Calculating if an Annual Allowance Tax Charge applies to you once you have utilised any unused Annual Allowance from the previous 3 tax years (Carry Forward) is your responsibility.
The information provided on this website does not constitute the provision of financial advice by UCL.
Independent Financial Advice
Information about where you can obtain Independent Financial Advice is available here.
Pension Scheme Information
- USS – An introduction to pensions tax
- NHSPS - Annual Allowance & Lifetime Allowance
- SAUL - Tax