Annual and lifetime allowances

Piggy bank

17 / 12 / 2015 Midnight

Members of the NHS Pension Scheme could receive a tax bill if their pension savings exceed limits set by HM Revenue and Customs (HMRC). These limits are known as the annual allowance, which is calculated each year and the lifetime allowance, which is calculated based on your overall pension savings.

This page contains the following information:

Annual allowance

Annual allowance is the amount of pension savings an individual can make in one year before receiving a tax charge. The annual allowance limit is £40,000 in 2015/16 (correct as at May 2015), the same as in 2014/15. The annual allowance was reduced from £50,000 in 2013/14.

If, in one scheme year, an individual’s pension savings are more than £40,000, they will receive a tax charge on the additional amount. The tax rate charged will reflect the individuals marginal tax rate.

It is possible to carry forward any unused annual allowance, provided the individual was a member of a qualifying pension scheme, at some time during all of the three previous tax years. An individual can carry forward unused annual allowances for a maximum of three years.

The Summer 2015 Budget announced the introduction of pensions tapered annual allowance from April 2016. You can find out more in the Summer 2015 Budget update.

Lifetime allowance

The lifetime allowance is the total amount that an individual can have in all their pension savings, during their lifetime, without incurring a tax charge. The lifetime allowance limit is £1.25million in 2015/16 (correct as at May 2015), the same as 2014/15, reduced from £1.5million in 2013/14. Lifetime allowance will reduce to £1million from 6 April 2016.

If an individual’s total pension savings are more than £1.25million in a lifetime, a tax charge may be incurred on any benefits in excess of the allowance. Over the £1.25million limit, any lump sum taken will be taxed at 55 per cent and pension will be taxed at 25 per cent.

Implications for members

Staff need to be aware of their total pension savings. They need to consider their personal circumstances and how they would like to manage their pension savings, including actions they may wish to take in relation to annual and lifetime allowance limits.

Implications for employers

Traditionally, it has been considered that a small number of NHS staff may be affected by the annual and lifetime allowances. Recent reductions to both allowances mean that more staff may be affected. The overall reward package you offer to your employees includes access to the NHS Pension Scheme (or an alternative scheme under auto-enrolment regulations). Exceeding the annual or lifetime allowances could affect the amount of pension your staff receive in retirement, thereby reducing the overall reward they receive for their employment.

It is important that employers are aware of the rules surrounding the annual and lifetime allowances. We have worked with KPMG, the independent actuary to the Scheme Advisory Board, to create a guide with more detail on the annual and lifetime allowances. The guide is comprehensive and includes examples of when an individual may breach the allowances, the impact of any NHS pay changes and considerations for employers.

View, download and share the NHS employers guide to annual and lifetime allowances.

Supporting staff to make informed pension decisions

To support your workforce to understand the potential implications of annual and lifetime allowances, you need to know which members of your workforce could be impacted and:

  • communicate with your workforce about the potential implications of breaching annual and lifetime allowances
  • signpost staff to further information and resources to help them plan their pension savings.

You can support and signpost staff to further information to highlight to staff the options available to them, however, you should not offer advice on what action the member should take.

Summer 2015 Budget update  

The Summer Budget 2015 announced a change to the current pensions annual allowance from April 2016. The change will see the introduction of a pensions tapered annual allowance. The intention of the change is to reduce pensions tax relief for high earners by introducing a tapered annual allowance for those with adjusted incomes (salary and employee and employer pension contributions) of over £150,000. 

The rate of reduction in the annual allowance (from the current maximum of £40,000) is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000 at £210,000. However, this is slightly different for those in defined benefit schemes, such as the NHS Pension Scheme.

The value of the contributions will be calculated in the same way as for the annual allowance calculation, by applying a factor of 16 to the increase in the benefit (the Pension Input Amount). This Pension Input Amount will be adjusted to reflect employee contributions to determine a deemed employer contribution. Government will set a net income threshold of £110,000 for clarity and to ‘provide certainty for individuals with lower salaries who may have one off spikes in their employer pension contributions’. However, salary sacrifice arrangements set up on or after 9 July 2015 will be included in the threshold.

Draft legislation to implement these changes will be published in the Summer Finance Bill 2015. We will be providing further supporting information in due course.

Consultation on proposed changes to existing tax relief for pension contributions

Following the Summer Budget 2015, the government has consulted on proposed changes to existing tax relief arrangements for pension contributions. The proposals included changes to the annual and lifetime allowances. The consultation closed on 30 September 2015 and we are awaiting the government response. Read more about the consultation on our consultation web page.

Further information

NHS Pensions have an annual allowance web page and a lifetime allowance web page with further information and frequently asked questions. They also have factsheets available on both annual and lifetime allowances on their tax information web page.

HMRC have two annual allowance calculators on their website which give an indication of whether an individual may be likely to breach the annual allowance limit in any one year.

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