What is the Annual Allowance?
The Annual Allowance (AA) 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. This is in addition to any income tax you pay on your pension once it is in payment.
If the value of your pension savings in any one year, including pension savings outside of the FPS are in excess of the annual allowance, the excess will be taxed as income.
The Government reduced the AA from £255,000 to £50,000 from 6 April 2011 and then reduced it again to £40,000 from 6 April 2014.
Further changes to the annual allowance were made for higher earners from 6 April 2016, which resulted in special transitional rules for the 2015-16 tax year. These changes, known as the tapered annual allowance are covered in more detail later.
The standard annual allowance increased from £40,000 to £60,000 from 6 April 2023.
| Annual Allowance limits since 2011/12 | |
|---|---|
| 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 (unless tapering applies) |
| 2017/18 | £40,000 (unless tapering applies) |
| 2018/19 | £40,000 (unless tapering applies) |
| 2019/20 | £40,000 (unless tapering applies) |
| 2020/21 | £40,000 (unless tapering applies) |
| 2021/22 | £40,000 (unless tapering applies) |
| 2022/23 | £40,000 (unless tapering applies) |
| 2023/24 | £60,000 (unless tapering applies) |
Am I likely to be affected by the Annual Allowance?
Most people will not be affected by the AA tax charge because the value of their pension saving will not increase in a year by more than £60,000 or if it does, they are likely to have unused allowance from previous years that can be carried forward.
You are most likely to be affected if:
- you have a lot of scheme membership and you receive a significant pay increase, and/or;
- you pay a high level of additional contributions, and/or;
- you are a higher earner, and/or;
- you transfer pension rights into the FPS from a previous public sector pension scheme under club transfer rules and your salary on joining the FPS is higher than your salary when you left the previous scheme, and/or;
- you combine a previous FPS pension benefit that was built up in the final salary section of the FPS with your current pension account and your salary has increased significantly since leaving and re-joining the scheme.
Your pension administrator will inform you if your FPS pension savings exceed the standard AA in any year by no later than 6 October of the following tax year.
How is the Annual Allowance calculated?
The increase in the value of your pension savings in the FPS in a year is worked out by taking the value of your benefits immediately before the start of the pension input period, increasing the value by inflation (Consumer Prices Index, or CPI) and then comparing it with the value of your benefits at the end of the pension input period.
The ‘pension input period’ (PIP) is the period over which your pension growth is measured. From 6 April 2016, PIPs for all pension schemes are aligned with the tax year – 6 April to 5 April. Before 2016-17 the PIP for the FPS was 1 April to 31 March, except for the year 2015-16 when special transitional rules applied.
In the FPS the value of your pension benefits is worked out by multiplying the amount of your annual pension by 16.
If the difference in the value of pension benefits at the end of the PIP minus the value of your pension benefits immediately before the start of PIP (adjusted for inflation), is more than the AA then you may be liable to pay a tax charge.
It is important to note that the assessment for the AA covers any pension benefits you may have where you have been an active member during the year, not just benefits in the FPS.
For example, if the increase in the value of your FPS benefits is calculated as £50,000 in 2023-24 when the AA is £60,000, but you also have an increase in the value of other pension benefits of £15,000 in the same year, that would mean you have a total increase in pension benefits of £65,000. If you do not have any carry forward (see below for more information), you will be liable for a tax charge for the amount you exceed the AA by; even though at face value you do not breach the AA in either scheme.
Carry forward
You would only be subject to an AA tax charge if the value of your total pension savings for a year increase by more than the AA for that year. However, a three year carry forward rule allows you to carry forward unused AA from the previous three years. This means that even if the value of your pension savings increases by more than the AA in a year you may not be liable to the AA tax charge.
For example, if the value of your pension savings in 2023-24 increased by £70,000 (i.e. by £10,000 more than the AA) but in the three previous years had increased by £25,000, £28,000 and £30,000, then the amount by which each of these previous years fell short of the AA for those three years would more than offset the £10,000 excess pension saving in the current year. There would be no AA tax charge to pay in this case.
To carry forward unused AA from an earlier year you must have been a member of a tax registered pension scheme in that year.
Changes to Annual Allowance
The Finance (No 2) Act 2015 introduced two important changes to the AA from 6 April 2016:
- An annual allowance taper for high earners from 6 April 2016 and
- To adjust the pension input period during 2015-16 so that it became aligned with the tax year from 6 April 2016.
Tapered Annual Allowance for higher earners
From the tax year 2016-17 the AA was tapered for members with a ‘Threshold Income’ in excess of £110,000, and ‘Adjusted Income’ in excess of £150,000. For every £2 that Adjusted Income exceeded £150,000, the AA was tapered down by £1 (to a minimum of £10,000).
These rates have been adjusted for the tax year 2023-24. Threshold Income is now £200,000 and the new Adjusted Income is £260,000. The minimum tapered annual allowance is £10,000.
You won’t be subject to the tapered annual allowance if your threshold income for that year is £200,000 or less, no matter what your adjusted income is.
| Income | Definition | Limit |
|---|---|---|
| Threshold Income | Broadly your taxable income after the deduction of your pension contributions | £200,000 |
| Adjusted Income | Broadly your threshold income plus pensions savings built up over the tax year | £260,000 |
Threshold income includes all sources of income that are taxable e.g. property income, savings income, dividend income, pension income, social security income (where taxable), state pension income etc.
Please note, you are not allowed to deduct from taxable income any amount of employment income given up for pension provision as a result of any salary sacrifice made on or after 9 July 2015.
The taper reduces the AA by £1 for £2 of adjusted income received over £260,000, until a minimum AA of £10,000 is reached.
Aligning the Pension Input Period with the tax year
The PIP is the period over which your pension growth is measured.
Up until 2014-15 the PIP in the FPS ran from 1 April to 31 March. From 6 April 2016, PIPs for all pension schemes are aligned with the tax year – 6 April to 5 April. Special transitional arrangements applied for 2015-16 meaning that there are 2 PIPs in 2015-16, as set out below:
Pre-alignment tax year: 1 April 2015 to 8 July 2015 - the revised AA during this period is £80,000
Post-alignment tax year: 9 July 2015 to 5 April 2016 - the AA for this period is the amount of the £80,000 not used up from the pre-alignment tax year (subject to a maximum of £40,000) together with any carry forward available from the three previous years.
If you have flexibly accessed any benefits in a money purchase pension arrangement on or after 6 April 2015 (see below) you should contact your pension administrator for information about how the pre and post alignment tax years will work as it will be different to the above.
Annual Allowance ‘Flexible Benefit’ access
If you have any benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed on or after 6 April 2015 then the Money Purchase Annual Allowance (MPAA) rules may apply. However, the MPAA will only apply if your total contributions to a money purchase arrangement in a Pension Input Period exceed the MPAA.
Generally, if you have flexibly accessed any benefits in a money purchase arrangement on or after 6 April 2015, any further contributions you make to a money purchase scheme in subsequent tax years will be tested against the MPAA. If your contributions exceed the MPAA your defined benefit pension (FPS) savings will be tested against the alternative AA and you will pay a tax charge in respect of your money purchase saving in excess of the MPAA.
| Tax year | MPAA | AA if MPAA IS EXCEEDED |
|---|---|---|
| 2016/17 | £10,000 | £30,000 |
| 2017/18 | £4,000 | £36,000 |
| 2018/19 | £4,000 | £36,000 |
| 2019/20 | £4,000 | £36,000 |
| 2020/21 | £4,000 | £36,000 |
| 2021/22 | £4,000 | £36,000 |
| 2022/23 | £4,000 | £36,000 |
| 2023/24 | £10,000 | £50,000 |
Special transitional rules applied for the tax year 2015-16 – contact your pension administrator for more information, if applicable.
If you access flexible benefits you will be provided with a flexible access statement; you should provide your administrator with a copy of this statement.
Flexible access means taking a cash amount over the tax-free lump sum from a flexi-access drawdown account, taking an uncrystallised funds pension lump sum (UFPLS), purchasing a flexible annuity, taking a scheme pension from a defined contribution scheme with fewer than 12 pensioner members or taking a stand-alone lump sum if you have primary but not enhanced protection
A stand-alone lump sum is a lump sum relating to pre 6 April 2006 where the whole amount can be taken as a lump sum without a connected pension
How would I pay an Annual Allowance tax charge?
If you exceed the AA in any year you are responsible for reporting this to HMRC on a self-assessment tax return, even if you don’t normally complete one. Your pension administrator is obliged to notify you if your FPS benefits exceed the standard AA, or if they believe you have exceeded the MPAA, in a year. They must inform you by no later than 6 October of the following tax year. However, your pension administrator is not obliged to inform you if you exceed the tapered annual allowance.
If you have an AA tax charge that is more than £2,000 and your pension savings in the FPS alone have increased in the year by more than the standard AA, you may be able to opt for the scheme to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits when you retire.
If you want your Fire and Rescue Authority (FRA) to pay some or all of an AA tax charge on your behalf, you must notify them no later than 31 July in the year following the end of the year to which the AA charge relates. However, if you are retiring (and draw all of your benefits from the FPS) and you want the scheme to pay some or all of the tax charge on your behalf from your benefits, you must tell your employer before you become entitled to those benefits.
Your FRA, at their discretion, may also agree to pay some or all of an annual allowance charge on your behalf in other circumstances e.g. where your pension savings are not in excess of the standard AA but are in excess of the tapered or money purchase AA, or where part of the charge relates to pension savings outside of the FPS. Contact your FRA for more information.
Sample timescales that would apply for an Annual Allowance tax charge incurred for the 2022-23 tax year:
| Date | Event |
|---|---|
| 5 April 2023 | Tax year ends |
| 6 July 2023 | FRA provides pay information to pension administrator |
| 6 October 2023 | Pension administrator provides pension saving statement to the scheme member who has breached the annual allowance |
| 31 January 2024 | Deadline for scheme member to submit Self-Assessment Tax Return stating how Annual Allowance tax will be paid |
| 31 July 2024 | Scheme Pays election deadline (if scheme member elects for scheme pays) |
| 31 January 2025 | Deadline for scheme to submit HMRC event report |
| 14 February 2025 | Deadline for scheme to pay tax to HMRC (if member elected for scheme pays) |
Am I affected?
If you think you are affected by the AA more information is available on the Government’s website - www.gov.uk/tax-on-your-private-pension/annual-allowance.
If you have any questions about your FPS membership or benefits, please contact your FRA's pension administrator.