Skip to main content

Annual Allowance Pension Savings Tax Charges

Pensions are the pots of money we look forward to when working. Only accessible when you retire but pay too much into it and you will be taxed for it now.

The Annual Allowance is the limit set by HMRC, and it is the maximum amount of tax-free growth an individual’s pension can have within a tax year. Go over it and you will be subject to a pension saving tax charge.

Over the years various changes have happened to what we all know as the pensions Annual Allowance. From the total amount reduced to the threshold income limits increase. One thing that hasn’t changed for some working in the NHS is the idea that if they work too much, they will not only be taxed on what they earn but how much their pension pot grows in the year. This has led to certain individuals reducing their hours or leaving the profession altogether.

What is the current pension Annual Allowance?

The current pension Annual Allowance stands at £40,000, down £10,000 compared to ten years ago when it was £50,000. Inflation however has grown over this time, and so has the average nominal pay of those working in the NHS.

NHS Pension growth is linked to CPI, and in the current climate where inflation is high, certain individuals may run into pensions tax charges through no fault of their own.

Excess of the Annual allowance is chargeable at income tax rates which mean individuals could be taxed anywhere between 20-45% on that amount depending on their level of income.

When does the taper of the allowance come into effect?

The taper of the allowance doesn’t kick in until you reach a higher amount of income:

£200,000 is the Threshold Income Limit and £240,000 is the Adjusted Income Limit.

This is up from a few years ago when it was £110,000 and £150,000 respectively. Surpass these limits and the Annual allowance decreases by £1 for every £2 in excess.

Those with higher levels of pay should be aware of the taper and the above limits as the growth of their pension pots is combined with their income to get to the total Adjusted Income. That means if an individual’s pension growth is £62,000, and their income is £200,000 the total adjusted income would be £260,000.

This is well in excess of the threshold and adjusted income limited meaning the induvial would have a tapered annual allowance of £30,000. If the total adjusted income of an induvial was in excess of £312,000 it would mean the induvial is entitled to the minimum Annual Allowance which is currently £4,000.

What about private pensions?

Private pensions are an area for individuals to review when trying to minimise pension savings tax charges. NHS Pensions do not provide a Pension Savings Statement if you are within the annual allowance for the year. It is therefore up to an individual to calculate the growth they may have in a year and the remaining allowances they have for private contributions.

Many of those within the NHS pension fail to realise this and top up their private pension pots throughout the year. The perceived tax benefit they are receiving then turns into a tax burden when they come to complete their tax returns for the year.

Could a promotion in the NHS lead to an excess tax charge?

A promotion within the NHS could also lead to an excess tax charge, as those who have historic membership of the 1995 have pensions linked to their final salary. This is less common for those within the 2015 scheme as their pension is linked to their average pay.

Unused allowances of the past three years can be carried forward to offset against in events of an excess.

Members of the NHS Pension scheme can elect for the scheme to pay the charge. This option is called a Scheme Pays Election. By using this option the scheme pays the tax charge now and it is recovered from the members’ pension pot at retirement.

What is the deadline for reporting an annual allowance tax charge?

The deadline for reporting an Annual Allowance tax charge is in line with completing a tax return.

This is because the tax charge is reported on your tax return by completing the Additional Information pages, a summary of the amount in excess would be disclosed on these pages. Failure to do so can result in interest and penalties being levied on any unpaid tax.