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HMRC internal manual

Pensions Tax Manual

Annual allowance: essential principles

Glossary PTM000001
   

 

Overview
What the annual allowance is
Amount of annual allowance
Who the annual allowance rules apply to
How the annual allowance is tested
When the annual allowance charge is payable for a tax year
How to work out the value of pension savings (pension input amounts) for a tax year
Pension savings that do not count towards the annual allowance
The amount of annual allowance charge
Who is responsible for paying the annual allowance charge

 

Overview

The annual allowance has applied from the tax year 2006-07 onwards. This guidance explains the annual allowance rules from 6 April 2011 including the money purchase annual allowance and tapered annual allowance rules.

For guidance on the annual allowance rules before 6 April 2011 and the special annual allowance rules that applied to certain individuals for tax years 2009-10 and 2010-11, see the Registered Pension Schemes Manual on the National Archives website (external users please refer to: [http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/r…](http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/rpsmmanual/RPSM00100000.htm)).

The following table shows the changes in the level of the annual allowance since it was introduced in 2006-07.

Tax Year Annual Allowance
   
2014-15 onwards £40,000*
2013-14 £50,000
2012-13 £50,000
2011-12 £50,000
2010-11 £255,000
2009-10 £245,000
2008-09 £235,000
2007-08 £225,000
2006-07 £215,000
  • For tax year 2015-16 only, a transitional £80,000 annual allowance applies.

As well as changes to the level of the annual allowance, over time changes to the rules of the annual allowance have also been made to introduce:

  • a special annual allowance which applied to certain individuals for tax years 2009-10 and 2010-11;
  • from tax year 2011-12 transitional provisions and general changes connected with the reduction of the annual allowance from £255,000 to £50,000;
  • from tax year 2015-16 a money purchase annual allowance for individuals who have flexibly accessed certain money purchase arrangements;
  • from tax year 2016-17
    • a tapered annual allowance for individuals with income for a tax year greater than £150,000.  Those affected will have their annual allowance for that tax year restricted on a tapered basis subject to a minimum reduced annual allowance of £10,000; and
    • the alignment of the period of time over which pension savings are measured (called a pension input period) with the tax year.

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What the annual allowance is

The annual allowance is the maximum amount of pension savings an individual can make each year with the benefit of tax relief.

This includes pension savings that individuals make plus any made by someone else on behalf of the individual - for example, their employer.

There is no limit on the amount of pension savings an individual can make each year but there is a limit in respect of the tax relief for those pension savings.

However, the annual allowance is not a restriction on the amount of tax relief given out when pension savings are made.

Instead the annual allowance works by applying a tax charge when the annual allowance is exceeded.

The tax charge recoups, in a broad way, the amount of tax relief given to the part of the annual increase in pension savings that is over the annual allowance.

This is particularly important in the context of an individual claiming relief on pension contributions. If the amount being claimed in one tax year is seemingly over the annual allowance for that year the amount of relief given out is not restricted to the annual allowance. Provided all the necessary conditions are met, relief is given on either £3,600 or (more likely in this case) the total of the individual’s relevant UK earnings, whichever is the greater. PTM040000 has more information about tax relief given to pension contributions.

Pension savings are tested against the annual allowance differently depending on the type of arrangement. For other money purchase arrangements and hybrid arrangements that might provide other money purchase benefits, it is the actual amount of contributions that are tested. For other types of arrangements (e.g. defined benefits) it is the increase in the value of benefit rights that is tested not the amount of contributions.

If a member’s pension saving is more than the annual allowance they will pay a tax charge on the amount over the annual allowance. This tax charge is called the annual allowance charge.

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Amount of annual allowance

Sections 228, 228ZA, 227ZA and 227B Finance Act 2004

From 6 April 2015 the amount of the annual allowance depends on the individual’s circumstances.

Tax year 2015-16 only

For tax year 2015-16 only, the amount of the annual allowance depends on:

  • how the transitional £80,000 annual allowance applies to the individual, and
  • whether or not the individual has flexibly accessed a money purchase arrangement.

Tax year 2016-17 onwards

From tax year 2016-17 the amount of the annual allowance depends on the tax year and whether:

  • the individual has flexibly accessed a money purchase arrangement,
  • the tapered annual allowance applies because the individual’s income is over £150,000.

For individuals who have not flexibly accessed a money purchase arrangement and the tapered annual allowance does not apply to them, the annual allowance is £40,000.

For individuals who have not flexibly accessed a money purchase arrangement and the tapered annual allowance applies to them:

  • the £40,000 annual allowance is reduced by £1 for every £2 of income above £150,000, but
  • subject to a minimum reduced annual allowance of £10,000.

For individuals who have flexibly accessed a money purchase arrangement and the tapered annual allowance does not apply to them:

  • the annual allowance is £40,000, or
  • a money purchase annual allowance applies for ‘money-purchase inputs’, and
  • an alternative annual allowance applies for ‘other inputs’.

For individuals who have flexibly accessed a money purchase arrangement and the tapered annual allowance applies to them:

  • the annual allowance is the reduced annual allowance after the £1 reduction for every £2 of income over £150,000 is applied, subject to a minimum reduced annual allowance of £10,000, or
  • a money purchase annual allowance applies for ‘money-purchase inputs’, and
  • an alternative annual allowance applies for ‘other inputs’.

The amount of the ‘money purchase’ annual allowance depends on the tax year.  For tax year 2016-17 it is £10,000, and for tax years 2017-18 onwards it is £4,000.

The ‘alternative’ annual allowance is found by subtracting the amount of the money purchase annual allowance for the tax year from the annual allowance or tapered annual allowance amount (as applicable) for the tax year.

For tax year 2016-17, the alternative annual allowance is £30,000 (£40,000 less £10,000) if the tapered annual allowance does not apply to the individual for that tax year.  If the tapered annual allowance does apply and the individual is subject to the minimum reduced annual allowance of £10,000, the alternative annual allowance is nil.

For tax years 2017-18 onwards, the alternative annual allowance is £36,000 (£40,000 less £4,000) if the tapered annual allowance does not apply to the individual for that tax year. If the tapered annual allowance does apply and the individual is subject to the minimum reduced annual allowance of £10,000, the alternative annual allowance is £6,000.

Where flexible access has occurred and ‘money-purchase inputs’ exceed the money purchase annual allowance (i.e. they exceed £10,000 for tax year 2016-17 or £4,000 for tax years 2017-18 onwards) the £40,000 annual allowance or tapered annual allowance (as applicable) will apply unless applying the money purchase annual allowance results in a greater amount being chargeable to the annual allowance charge.

PTM058000 has details about the transitional £80,000 annual allowance for tax year 2015-16.

PTM056520 has details about flexibly accessing a money purchase arrangement.

PTM053100 and PTM056510 have details about ‘money-purchase inputs’ and ‘other inputs’.

PTM056510 and the When the annual allowance charge is payable for a tax year section below have further details about the application of the annual allowance or money purchase annual allowance.

PTM057100 has details about the tapered annual allowance.

 

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Who the annual allowance rules apply to

The annual allowance rules apply to members of registered pension schemes (from 6 April 2011, including members with enhanced protection). They also apply to members of overseas pension schemes where either they or their employer qualify for UK tax relief:

  • under a double taxation agreement
  • under section 307 Income Tax (Earnings and Pensions) Act 2003
  • due to migrant member relief (see PTM111200), or
  • due to transitional corresponding relief (see PTM111500).

Pension saving under a UK pension scheme that is not a registered pension scheme does not count towards the annual allowance. So savings under a UK employer-financed retirement benefits scheme do not count towards the annual allowance.

Savings under a non UK scheme will not count towards the annual allowance if neither the individual nor their employer qualified for UK tax relief under the provisions shown above.

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How the annual allowance is tested

To work out if an individual has to pay an annual allowance charge they need to find the total amount of their pension saving counting for a tax year.

Pension savings are called pension input amounts by the legislation. The amount of pension savings under all the arrangements for schemes of which an individual is a member counting for a tax year is called the total pension input amount.

The value of an individual’s pension input amount is measured over a period of time called a pension input period.

Sections 238, 238ZA, 238ZB and paragraph 9 Schedule 34 Finance Act 2004

From 6 April 2016 onwards pension input periods for existing arrangements will match the tax year so that they run from 6 April to the following 5 April.

Regardless of how many arrangements an individual has under one or more registered pension schemes, the pension input period for each arrangement will match the tax year. Previously, pension input periods did not have to match the tax year.

Where the first pension input period for a new arrangement starts on or after 9 July 2015 that pension input period will end on the following 5 April.

PTM052000 gives full information about pension input periods.

Tax year 2015-16 is a transitional year to ensure that all pension input periods will match the tax year from 2016-17 onwards.  PTM058000 has details about the transitional pension input period rules for 2015-16.

For an overseas pension scheme the pension input period must match the UK tax year so that it runs from 6 April to the following 5 April.  This has always been the case since the annual allowance was introduced in tax year 2006-07.

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When the annual allowance charge is payable for a tax year

Sections 227 - 228A Finance Act 2004

Note that different guidance applied before 6 April 2015 for individuals who have entered into either drawdown pension or dependants’ drawdown pension using flexible drawdown. See page RPSM06105070 of the Registered Pension Schemes Manual on the National Archives website (external users please see: [http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/r…](http://webarchive.nationalarchives.gov.uk//http://hmrc.gov.uk/manuals/rpsmmanual/RPSM00100000.htm)).

The first step for finding out if any annual allowance charge is due, is to work out the individual’s total pension input amount for the tax year. Guidance on how to calculate an individual’s pension input amount starts at PTM053000.

For tax years 2011-12, 2012-13, 2013-14 and 2014-15, the money purchase annual allowance does not apply but see further down this page for how the total pension input amount is taken into account.

For tax years 2015-16 onwards, how the individual’s total pension input amount is taken into account will depend on:

  • whether the individual has flexibly accessed a money purchase arrangement on or after 6 April 2015, and
  • if so, whether the money purchase annual allowance applies because after sorting the individual’s total pension input amount into a ‘money-purchase input’ (if any) and ‘other input’ (if any)

    • the individual’s money-purchase input has exceeded the money purchase annual allowance resulting in an excess money purchase amount, and
    • adding the excess money purchase amount to the excess on the other input (if any), after applying the ‘alternative’ annual allowance to the other input, results in a greater amount being chargeable to the annual allowance charge than if the annual allowance applied to the individual’s total pension input amount.

Otherwise, the individual’s total pension input amount for the tax year is tested against the annual allowance.

Note – for tax year 2016-17 onwards the tapered annual allowance will also apply for individuals with income over £150,000.  This is the case regardless of whether or not the individual has flexibly accessed a money purchase arrangement on or after 6 April 2015.

Money purchase annual allowance does not apply

If the individual has not flexibly accessed a money purchase arrangement on or after 6 April 2015 the money purchase annual allowance does not apply and there is no annual allowance charge due if the total pension saving (total pension input amount) is not more than the annual allowance.

Note – for tax year 2016-17 onwards the tapered annual allowance will also apply for individuals with income over £150,000.

Even if the individual’s total pension input amount is more than the annual allowance (tapered basis or not) an annual allowance charge may still not be due.

The next step is to see if the individual has any unused annual allowance from recent previous tax years.

An individual can carry forward any annual allowance they have not used in recent previous tax years to the current tax year. Which previous tax years apply in relation to a current tax year depends on the current tax year in question (see PTM055100).  The individual adds the amount of the unused annual allowance to this year’s annual allowance (or, when it applies, tapered annual allowance) which gives the total amount of available annual allowance.

If the individual’s total pension input amount is more than their available annual allowance they will have to pay the annual allowance charge - but only on the amount over their available annual allowance.

Example

Bob has total pension savings of £85,000 for the tax year 2011-12. This is more than the £50,000 annual allowance for that tax year.

However, in each of the three previous tax years his pension saving was £30,000 below the annual allowance for the tax year (note for the purpose of carry forward the annual allowance is treated as £50,000 for each of the tax years 2010-11, 2009-10 and 2008-09). This means Bob has £90,000 unused annual allowance to carry forward.

Together with the £50,000 annual allowance for the tax year Bob can have pension savings of £140,000 without an annual allowance charge arising.

As Bob’s £85,000 pension saving is less than his available annual allowance there is no annual allowance charge for that tax year.

PTM055100 explains how the carry forward rule works.

There are special rules for calculating the amount available for carry forward to tax years 2011-12, 2012-13 and 2013-14. Guidance about this can be found at PTM055300.

PTM057100 explains how the tapered annual allowance works.

Money purchase annual allowance applies

The money purchase annual allowance can apply for tax year 2015-16 onwards when an individual has flexibly accessed a money purchase arrangement on or after 6 April 2015.

If the individual has so flexibly accessed, they must compare whether applying the money purchase annual allowance produces a greater amount subject to the annual allowance charge than applying the annual allowance.  If it does not the annual allowance will apply for the tax year concerned.

If the money purchase annual allowance does apply it means the individual has a ‘money-purchase input’ which:

  • occurred after flexibly accessing a money purchase arrangement, and
  • exceeded the money purchase annual allowance.

The individual has to pay an annual allowance charge on the amount of the ‘money-purchase input’ over the money purchase annual allowance (i.e. the amount over £10,000 for tax year 2016-17 or, for subsequent tax years, the amount over £4,000).

If the individual has ‘other inputs’ as well (essentially defined benefit inputs) there is no annual allowance charge due on them if they do not exceed the alternative annual allowance.

The ‘alternative’ annual allowance for a tax year is the amount of the annual allowance for the same tax year less the money purchase annual allowance.

For individuals not subject to the tapered annual allowance, the ‘alternative’ annual allowance is:

  • for tax year 2016-17, £30,000 (£40,000 less £10,000), and
  • for tax years 2017-18 onwards, £36,000 (£40,000 less £4,000).

Where the individual is subject to the tapered annual allowance, the ‘alternative’ annual allowance is found by subtracting the amount of the money purchase annual allowance for the tax year from the amount of the reduced annual allowance for the tax year. For tax year 2016-17 only, if the minimum reduced annual allowance of £10,000 applies, the ‘alternative’ annual allowance is nil.

Even if the individual’s ‘other inputs’ are more than the alternative annual allowance an annual allowance charge may still not be due on those inputs.

The next step is to see if the individual has any unused annual allowance from recent previous tax years.

An individual can carry forward any annual allowance they have not used in recent previous tax years to the current tax year. Which previous tax years apply in relation to a current tax year depends on the current tax year in question (see PTM055100). The individual adds the amount of the unused annual allowance to the alternative annual allowance. This gives the total amount of available annual allowance for the ‘other inputs’.

If the individual’s ‘other inputs’ are more than their available annual allowance they will have to pay the annual allowance charge in respect of the ‘other inputs’ as well - but only on the amount over their available annual allowance.

Note that unused annual allowance cannot be added to the money purchase annual allowance that applies for the ‘money-purchase inputs’.

Example

Bob flexibly accessed a money purchase arrangement in tax year 2016-17 and has total pension savings of £85,000 for the tax year. This includes a ‘money-purchase input’ of £15,000 all of which occurred after flexibly accessing and an ‘other input’ of £70,000.

Bob has £90,000 unused annual allowance to carry forward. The tapered annual allowance does not apply to Bob for the tax year.

Together with the £30,000 alternative annual allowance for the tax year Bob can have ‘other input’ amounts of £120,000 without an annual allowance charge arising on those ‘other inputs’.

As Bob’s £70,000 ‘other inputs’ are less than his available annual allowance there is no annual allowance charge in respect of them for the tax year.

However, Bob does have an annual allowance charge in respect of his ‘money-purchase input’ for the tax year. The chargeable amount is £5,000 (£15,000 less the money purchase annual allowance, the amount being £10,000 in this case).

Note - in this case, the money purchase annual allowance applies because it results in a greater amount being chargeable to the annual allowance charge than if the annual allowance of £40,000 was applied.

If the annual allowance was applied to Bob’s £85,000 total pension savings for the tax year together with the £90,000 unused annual allowance, there would be no amount chargeable.

PTM056520 has details about flexibly accessing a money purchase arrangement.

PTM053100 and PTM056510 have details about ‘money-purchase inputs’ and ‘other inputs’.

PTM056510 has details about the application of the annual allowance or money purchase annual allowance.

PTM057100 explains how the tapered annual allowance works.

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How to work out the value of pension savings (pension input amounts) for a tax year

Sections 227C to 227F and 229 to 237 Finance Act 2004

The first step is to work out the pension savings (pension input amount) for each arrangement that an individual is a member of. This is the increase in value of the pension saving over the pension input period.

PTM052000 gives more information about pension input periods.

How the increase for a particular pension arrangement is measured depends on what type of arrangement it is.

For other money purchase arrangements broadly the pension input amount for an individual is the total gross contributions paid in the pension input period by:

  • the individual
  • their employer, and
  • any other person on behalf of the individual.

PTM053200 gives full information on how to work out the pension input amount for an other money purchase arrangement.

For defined benefits arrangements the pension input amount is based on how much the value of the individual’s accrued pension and, in certain cases, lump sum has gone up over the pension input period. A general ‘rule of thumb’ for defined benefits arrangements is that large pay increases can create large pension input amounts, particularly when combined with long pensionable service. High pensionable pay and high accrual rates also result in higher pension savings. So all other conditions being equal, someone who builds up benefits at a rate of 1/50th per year of service will have a larger pension input than someone with a 1/60th accrual rate.

PTM053300 gives more information on how to work out the pension input amount for a defined benefits arrangement.

For cash balance arrangements the pension input amount is based on the increase in the individual’s promised pension pot over the pension input period.

PTM053400 gives more information on how to work out the pension input amount for a cash balance arrangement.

For a hybrid arrangement the possible types of benefit and their pension input amounts have to be identified. If, for example, the arrangement offered possible money purchase or defined benefits the pension savings amount is worked out as if it were a money purchase benefit and also as a defined benefit. The pension input amount for a hybrid arrangement is the greatest of the possible pension input amounts.

PTM053500 gives more information on how to work out the pension input amount for a hybrid arrangement.

The individual’s total pension input amount is the total of all the individual’s pension input amounts for each arrangement.

PTM051700 gives information about how an individual can find out what their pension input amounts are.

PTM056500 gives information about certain adjustments that might need to be made to the pension input amounts described above when an individual has flexibly accessed a money purchase arrangement and application of the money purchase annual allowance is being considered.

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Pension savings that do not count towards the annual allowance

Section 229(3) and (4) Finance Act 2004

Any pension savings made in a pension input period in which the individual:

  • dies, or
  • becomes entitled to those pension savings due to severe ill-health

do not count towards the annual allowance.

For tax years before 2016-17, pension input periods did not have to align with the tax year.  Individuals could therefore make pension savings in a pension input period that began in the tax year in which they died or became entitled to benefits due to severe ill-health but that pension input period ended in the following tax year.  Any such pension savings do not count towards the annual allowance.

PTM051200 has more information and explains the conditions that need to be met for the severe ill-health exemption.

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The amount of annual allowance charge

First, the individual must check whether they have any unused annual allowance available to carry forward from recent previous tax years to increase the allowance available for the current tax year. Unused annual allowance will decrease the amount of pension input liable to the annual allowance charge (note - unused annual allowance cannot be used to offset a ‘money-purchase input’ exceeding the money purchase annual allowance when that allowance applies, see PTM055100).

PTM055000 explains when and how an individual can carry forward unused annual allowance.

The annual allowance tax charge is due on any pension savings (pension input amounts) over and above the annual allowance available for the tax year or, if it applies, over and above the money purchase annual allowance.

The effect of the annual allowance tax charge is to restrict tax relief on any pension savings over the available annual allowance or, if it applies, money purchase annual allowance.

To find out the amount of the annual allowance charge the individual needs to add the amount of the excess pension savings to the amount of their taxable income. The amount of pension saving:

  • over the individual’s higher rate limit will be taxed at 45 per cent (50 per cent for 2011-12 and 2012-13)
  • over the individual’s basic rate limit but below the member’s higher rate limit will be taxed at 40 per cent
  • below the individual’s basic rate limit will be taxed at 20 per cent.

Note - the annual allowance charge cannot be avoided simply by ‘undoing’ a contribution. In fact not only will the individual still have made a pension input, the payment back to the individual will also probably be an unauthorised member payment.

There is an exception where relievable pension contributions are paid by, or on behalf of, the individual during a pension input period for an other money purchase arrangement but which are subsequently returned to the individual by way of a refund of excess contributions lump sum that is made in a pension input period ending in the tax year 2014-15 or a later tax year (see PTM053200 for more details).

Note – from tax year 2016-17 onwards the annual allowance charge applies in the same way for an individual who is a Scottish taxpayer, except that the appropriate tax rates are replaced with the ‘Scottish main rates’ equivalent. In practice, this means the Scottish basic rate replaces basic rate, Scottish higher rate replaces higher rate and Scottish additional rate replaces additional rate.

If the individual is filing their tax return online the individual inputs their calculated excess pension savings amount and the online system will work out the amount of the tax charge for them.

Example

John has £10,000 excess pension saving on which he has to pay the annual allowance charge for tax year 2011-12. John also has £142,000 taxable income for the tax year 2011-12. The total of John’s taxable income and excess pension saving is £152,000.

For the purpose of this example the higher rate limit is £150,000. The basic rate limit is £40,000.

£2,000 of John’s excess pension saving is above the £150,000 higher rate limit. £8,000 of his pension saving is above the basic rate limit but below the higher rate limit. John’s tax charge is calculated as

£2,000 @ 50 per cent = £1,000

£8,000 @ 40 per cent = £3,200

John’s annual allowance charge is £4,200.

PTM056000 gives full details on how to work out the rate of the annual allowance charge.

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Who is responsible for paying the annual allowance charge

Section 237A and 237B Finance Act 2004

The individual is responsible for paying the annual allowance charge. The individual remains responsible for paying the annual allowance charge even if they or any of their pension schemes are not UK resident.

The individual may share responsibility for paying the annual allowance charge to HMRC with a scheme administrator by asking the scheme administrator to pay the charge out of the individual’s benefits in the scheme.

The individual can demand this of a scheme administrator of a particular registered pension scheme (‘mandatory basis’) if the following applies:

  • the amount of the individual’s annual allowance charge for the tax year is more than £2,000, and
  • the amount of the individual’s pension saving (their pension input amount) in that pension scheme for the same tax year is more than the annual allowance for the tax year (for example, for tax year 2016-17, this means more than £40,000 - i.e. the tapered annual allowance is ignored).

The individual must tell the scheme administrator that they want the scheme to pay the tax. Full details on what must be done to exercise the option of the annual allowance charge being paid from an individual’s pension saving in a scheme can be found from PTM056400.

Otherwise, it may be that a scheme is prepared to offer the option on a voluntary basis.

The individual must complete a Self Assessment tax return to show the amount by which their total pension savings exceeds their annual allowance and submit the return to the usual filing deadlines.

The individual must do this even if they are sharing responsibility for paying the annual allowance charge with one or more of their scheme administrators.

The Self Assessment tax return, additional pages and help sheets guide the individual through the process of working out the pension savings from their pension schemes. Based on the input figure for excess savings, the tax charge will be worked out for the individual and is payable as part of their Self Assessment tax bill.

More information on how to report and pay the annual allowance charge can be found at PTM056200.