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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Annual allowance: money purchase annual allowance: general

General
Money purchase annual allowances and alternative annual allowances – tax year 2015-16 only
Money purchase annual allowance and alternative annual allowance – tax year 2016-17 onwards
The money purchase annual allowance test - tax year 2015-16 only
The money purchase annual allowance test - tax year 2016-17 onwards
 

General

The money purchase annual allowance rules counter individuals using the flexibilities around accessing a money purchase arrangement as a means to avoid tax on their current earnings by diverting their salary into their pension scheme with tax relief and then effectively withdrawing 25 per cent tax-free.

For the tax year 2015-16 onwards individuals who flexibly access a money purchase arrangement in certain circumstances will trigger the money purchase annual allowance rules.

Note – tax year 2015-16 is split into two ‘mini’ tax years for annual allowance and money purchase annual allowance purposes, the pre-alignment tax year and the post-alignment tax year (see PTM058010 for more details).

Individuals who flexibly access will be subject to a modified annual allowance test and will have a specific annual allowance in respect of their money purchase pension savings (the ‘money purchase’ annual allowance).

If the specific money purchase annual allowance limit is exceeded, individuals will have a reduced annual allowance for the remainder of their pension savings (in addition to the specific money purchase annual allowance). This reduced annual allowance in respect of the remaining pension savings is defined in the legislation as the ‘alternative’ annual allowance.

If the specific money purchase annual allowance limit is not exceeded individuals will retain the annual allowance for all their pension savings.

Such individuals will need to establish each tax year whether the money purchase annual allowance applies for that tax year or whether the annual allowance applies instead.

The money purchase annual allowance will apply for a tax year where its application produces a greater amount subject to the annual allowance charge compared to the annual allowance being applied. Otherwise the annual allowance will apply for the tax year concerned.

Money purchase annual allowances and alternative annual allowances – tax year 2015-16 only

Tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes, the pre-alignment tax year and the post-alignment tax year. This split applies for both the annual allowance and money purchase annual allowance.

If an individual has triggered the money purchase annual allowance rules at any time during the period starting 6 April 2015 and ending on 5 April 2016, the amount of money purchase annual allowance and alternative money purchase annual for the pre-alignment tax year or post-alignment tax year (or both tax years) depends on the circumstances of the individual.

See PTM058030 for more details about the money purchase and alternative annual allowances for the pre and post-alignment tax years.

Money purchase annual allowance and alternative annual allowance – tax year 2016-17 onwards

The following limits apply from 6 April 2016 onwards, whether the individual triggered the money purchase annual allowance rules on or after 6 April 2016 or at any time during the period starting 6 April 2015 and ending on 5 April 2016.

The money purchase annual allowance for tax year 2016-17 onwards is £10,000.

The alternative annual allowance is £30,000 or a lesser amount.  It will be less than £30,000 when the tapered annual allowance also applies to the individual for the tax year concerned (i.e. tax year 2016-17 or a later tax year).

PTM057100 explains how the lesser amount of alternative annual allowance is calculated.

Any unused annual allowance that can be carried forward from the previous tax years is added to the alternative annual allowance (i.e. added to the £30,000 amount or lesser amount).

Note – the ‘previous tax years’ mentioned above means the previous four tax years where the current tax year is any of 2016-17 to 2018-19.  For 2019-20 onwards it means the previous three tax years.

Note – an individual’s alternative annual allowance for a tax year is nil if the tapered annual allowance applying for the same tax year means the individual’s reduced annual allowance is £10,000.

The money purchase annual allowance test – tax year 2015-16 only

Tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes, the pre-alignment tax year and the post-alignment tax year.  This split applies for both the annual allowance and the money purchase annual allowance.

An individual who triggers the money purchase annual allowance test for the pre-alignment tax year or post-alignment tax year (or for both ‘mini’ tax years) has a specific allowance for money purchase pension input amounts for the tax year concerned as well as an ‘alternative’ annual allowance for ‘other inputs’.

The money purchase annual allowance and alternative annual allowance tests are the same as for tax year 2016-17 onwards, except that

  • the actual amount of the money purchase annual allowance and alternative annual allowance for the pre-alignment tax year or post-alignment tax year (or both) depends on the individual’s circumstances,
  • for the pre-alignment tax year only, there is a further adjustment to what is tested against the money purchase annual allowance and the alternative annual allowance where there are pension input amounts for pension input periods that end in the ‘mini’ tax year but before triggering the money purchase annual allowance, and
  • unlike for tax year 2016-17 onwards, the tapered annual allowance does not have effect for either of the pre and post-alignment tax years.

PTM058030 has more details about the money purchase annual allowance and alternative annual allowance tests for the pre and post-alignment tax years.  

The money purchase annual allowance test – tax year 2016-17 onwards

An individual who has triggered the money purchase annual allowance test for a tax year has a £10,000 allowance for money purchase pension input amounts for the tax year concerned.

The money purchase pension input amounts which are tested against the £10,000 allowance are those which occur (or are treated as occurring) after the individual first flexibly accesses a money purchase arrangement in certain circumstances.

If the £10,000 allowance for money purchase pension input amounts is exceeded, the individual has an ‘alternative’ annual allowance for any other pension input amounts (essentially, any pension input amounts for defined benefits arrangements) that have to be taken into account for the same tax year.

To ensure that the same pension input amounts are not subject to the annual allowance twice, any pension input amounts tested against the £10,000 money purchase annual allowance will not be tested against the alternative annual allowance.

£10,000 money purchase allowance exceeded

If the individual’s money purchase pension input amounts do exceed £10,000:

  • the amount over £10,000 is added to-
  • the portion (if any) of the other pension input amounts that exceeded the sum of the alternative annual allowance plus any unused annual allowance carried forward from the previous tax years (previous four tax years where the current tax year is the post-alignment tax year or 2016-17, 2017-18 or 2018-19, otherwise previous three tax years)

to establish a chargeable amount potentially subject to the annual allowance charge (‘the alternative chargeable amount’).

The individual’s total pension input amount for the tax year (i.e. the total of any money purchase pension input amounts, any pension input amounts for defined benefits arrangements and any pension input amounts for hybrid arrangements) is also tested against the individual’s available annual allowance, being the sum of:

  • the annual allowance for the tax year (e.g. £40,000 for tax year 2016-17 or a reduced amount if the tapered annual allowance applies), and
  • any unused annual allowance that can be carried forward from the previous tax years (previous four tax years where the current tax year is the post-alignment tax year or 2016-17, 2017-18 or 2018-19, otherwise previous three tax years)

to establish what portion of the total pension input amount (if any) is over the individual’s available annual allowance and potentially subject to the annual allowance charge (‘the default chargeable amount’).

If the alternative chargeable amount is greater than the default chargeable amount, the alternative chargeable amount is subject to the annual allowance charge for the tax year concerned.

Otherwise the default chargeable amount (if there is any such amount) is subject to the annual allowance charge.

£10,000 money purchase allowance not exceeded

If the individual’s money purchase pension input amounts do not exceed £10,000:

  • the individual’s total pension input amount for the tax year is tested against the individual’s available annual allowance (the annual allowance or, if the tapered annual allowance applies, the reduced annual allowance for the tax year plus any unused annual allowance carried forward from the previous four or three tax years), and
  • any unused money purchase annual allowance cannot be carried forward to later tax years.

Example 1

David has a money purchase arrangement and a defined benefits arrangement and has flexibly accessed his money purchase arrangement in the tax year, which triggers the money purchase annual allowance test in addition to the annual allowance test for that tax year (and subsequent tax years).

David’s pension input amount for his money purchase arrangement for the tax year is £6,000. As this amount is less than the £10,000 allowance for money purchase pension input amounts there is no further test against the money purchase annual allowance for the tax year concerned.

His total pension input amount for the tax year is therefore tested against the annual allowance for the tax year. In this case a £40,000 annual allowance, as the tapered annual allowance does not apply.

David’s pension input amount for his defined benefits arrangement is £32,000. This means his total pension input amount for the tax year is £38,000 (£6,000 + £32,000). As this is less than £40,000, no annual allowance charge is due for the tax year.

Also, David has £2,000 unused annual allowance to carry forward to the next year.

Assuming David had no other annual allowance to carry forward from previous years and the annual allowance, money purchase annual allowance and alternative annual allowance remain at £40,000, £10,000 and £30,000 respectively, the next tax year he will have an available annual allowance of £42,000 (assuming the tapered annual allowance does not apply). For the purpose of the money purchase annual allowance test, he will have an available alternative annual allowance of £32,000 but his allowance for any money purchase pension input amounts remains at £10,000.

Example 2

Isobel has a money purchase arrangement and a defined benefits arrangement and has flexibly accessed her money purchase arrangement in the tax year, which triggers the money purchase annual allowance test in addition to the annual allowance test for that tax year (and subsequent tax years).

The annual allowance for the tax year is £40,000 and the tapered annual allowance does not apply to Isobel for the tax year concerned.

She has no available unused annual allowance to carry forward to the current tax year.

Isobel’s total pension input amount for the tax year is £39,000, which includes a pension input amount for her money purchase arrangement of £11,000.

All of Isobel’s money purchase pension input amount occurred after the flexible access which means the £10,000 money purchase annual allowance has been exceeded for the tax year by £1,000.

The pension input amount for Isobel’s defined benefits arrangement is £28,000, which is less than the alternative annual allowance. The alternative annual allowance in this case being £30,000 (the annual allowance of £40,000 less £10,000).

As Isobel’s money purchase pension input amount has exceeded the £10,000 money purchase annual allowance, Isobel must establish whether:

  • the ‘alternative chargeable amount’, which is the total of the excess of Isobel’s money purchase pension input amount over the £10,000 allowance plus the excess of the defined benefits pension input amount over the alternative annual allowance of £30,000,

is greater than:

  • the ‘default chargeable amount’, which is the excess of Isobel’s total pension input amount (the money purchase pension input amount plus the defined benefits input amount) over the annual allowance of £40,000.

That is if:

  • the excess of £11,000 over £10,000 (£1,000) plus the excess of £28,000 over £30,000 (nil) = £1,000 (the ‘alternative chargeable amount’)

is greater than:

  • the excess of £28,000 plus £11,000 over £40,000 = £0 (the ‘default chargeable amount’).

If so, the ‘alternative chargeable amount’ applies. Otherwise the ‘default chargeable amount’ applies.

In Isobel’s case, the ‘alternative chargeable amount’ is greater than the ‘default chargeable amount’, which means the ‘alternative chargeable amount’ applies.

Isobel is liable to an annual allowance charge on her ‘alternative chargeable amount’ of £1,000.