Here we explain more about annual allowance and its implication on members and how employers can make affected staff aware of their annual allowance tax liabilities.
The annual allowance is the amount of pension savings an individual can make in one year before receiving a tax charge. The standard annual allowance limit has been set at £40,000 since 6 April 2014. Employees may be subject to a lower tapered annual allowance, depending on their taxable income. If an individual’s pension savings are more than the annual allowance (in one scheme year), they will receive a tax charge on the additional amount. The tax rate charged will reflect the individual's marginal tax rate.
Our annual allowance briefing will give you more information on who is likely to be affected by annual allowance and will support conversations with members of the NHS Pension Scheme in your organisation.
Tapered annual allowance
The tapered annual allowance reduces tax relief for higher earners. From 6 April 2020, the taper will apply to those with a threshold income (taxable income including earnings from all employment and income from other sources such as rental properties, investments and pensions) of over £200,000 and adjusted income (threshold income plus the value of pension savings) of over £240,000.
Both thresholds have been increased by £90,000 from the previous values of £110,000 and £150,000 respectively.
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 £240,000. The reduction is applied up to a minimum annual allowance of £4,000 once adjusted income reaches £312,000. This means an individual's tapered annual allowance will be between £40,000 and £4,000.
Benefits are tested against the tapered annual allowance by applying a factor of 16 to the increase in the benefit (the pension input amount) over the year.
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 allowance limits.
Recent changes to the annual allowance taper thresholds have reduced the number of NHS staff affected by the taper. However, many higher earners may still be impacted by annual allowance at the standard £40,000 limit.
NHS Pensions has an annual allowance web page with further information and frequently asked questions. It also provides fact sheets on both annual and lifetime allowances on its tax information web page.
HMRC has two annual allowance calculators on its website which give an indication of whether an individual may be likely to breach the annual allowance limit in any one year.