Contributions annual allowance and tax relief - frequently asked questions

A: The annual allowance limits the amount of tax relievable pension savings that can be made by or on behalf of a member each year. Since the 2015/16 tax year, pension input periods have been aligned with tax years. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of a member's rights over the scheme's pension input period.

Rates & Factors: Annual allowance & money purchase annual allowance

A: The annual allowance applies in total to all pension increases a member may have. See below for details how these increases are valued when testing against the annual allowance. 

Money purchase benefits

The total contributions paid in any pension input period.

Notes:
This includes all member, employer and third party contributions

PTM053200: pension input amounts: money purchase arrangements

PTM058060: transitional rules for tax year 2015-16

Cash balance plans

The increase in the value of the member's rights over the pension input period.

Notes:
When working out how much the benefits have increased by, increase the value of the plan at the beginning of the pension input period by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated. This is then compared with the value at the end of the period.

The rights to be valued will include partial benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.

Defined benefits schemes

The increase in value of the member's rights during the pension input period.

Notes:
When working out how much the benefits have increased by, calculate the annual pension amount at the beginning of the pension input period (this is the pension that the member would get if they retired now at normal pension age). The total should then be increased by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated.  Then multiply this amount by 16. If the scheme also gives the member a lump sum in addition to the pension (i.e. not by commutation of pension), add this on. 

Then calculate the value at the end of the pension input period; the end value shouldn't be increased by CPI. Multiply this amount by 16. Again if the scheme also gives the member a lump sum in addition to the pension (i.e. not by commutation of pension), add this on.

Deduct the start value you from the end you have calculated above, this is the pension input amount.

The rights to be valued will include any benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.

A: If the amount paid in the pension input period exceeds the annual allowance for that year an annual allowance charge must be paid, unless there is unused annual allowance to carry forward from previous pension input periods. Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

Since 6 April 2015 there is a new annual allowance called the money purchase annual allowance (MPAA).  If the MPAA is triggered, only £4,000 can be paid to all defined contribution plans in any pension input period before the annual allowance tax charge is applied. If this occurs part-way through a pension input period only the contributions made after the trigger are tested against the MPAA. However the total contributions/accrual in that tax year are also tested against the £40,000 annual allowance. For more information see our article Annual allowance.

Since 6 April 2016, individuals who have 'adjusted income' for a tax year of greater than £150,000 have their annual allowance for that tax year restricted. It is reduced, so that for every £2 of income they have over £150,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction is £30,000, so anyone with income of £210,000 or more has an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or pay an annual allowance charge. For more information see our article tapering of annual allowance.

A: Yes, unused annual allowance from pension input periods ending in the previous three tax years can be carried forward to the current pension input period. The annual allowance for pension input periods ending in the current tax year is £40,000.  Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

It's still possible to carry forward unused annual allowance from previous years to a year where the taper applies. However the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount. For more information see our article tapering of annual allowance.

It's not possible to carry forward unused annual allowance to a defined contribution plan if the money purchase annual allowance has been triggered. DC contributions must be limited to £4,000 to avoid an AA tax charge.

A: Where a member dies, or takes benefits on a severe or serious ill-health basis, no pension input amount will arise for the pension input period ending within that tax year.

PTM051200: When the annual allowance charge does not apply

A: Yes an individual, other than the employer or former employer, may contribute to a scheme on behalf of the member. It's treated as if made by the member, so for tax relief to be given, it would have to be no more than the higher of £3,600 and 100% of the member’s relevant UK earnings.

A: Employer contributions qualify for full corporate tax relief, assuming that they meet the 'wholly and exclusively' requirements. Members are subject to a tax charge on the amount of any contribution (both member and employer) paid in excess of the annual allowance each year. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of a member's rights over the pension input period.

Since the 2015/16 tax year, pension input periods have been aligned with tax years. 

Employer contributions usually benefit from full corporate tax relief in the accounting period in which they are paid. However, if the employer pays a pension contribution that's more than £500,000 of what's been paid in previous years they may have tax relief spread over a period of years.

A: Members will be subject to a tax charge (annual allowance charge or money purchase annual allowance charge, if it applies) on the amount of any contribution (both member and employer) paid in excess of the annual allowance; tapered annual allowance or money purchase annual allowance each year.

A: No, unused tax relief can't be carried forward from a previous tax year. What can be carried forward is any unused annual allowance from a previous pension input period. If the amount of contributions paid is more than the annual allowance available in the pension input period, any unused annual allowance from previous pension input periods can be carried forward to increase that year's annual allowance. Katie can go back as far as pension input periods ending three tax years ago.

See our article on Carry forward for further details.

If Katie had triggered the money purchase annual allowance then she can only use carry forward to allow her to pay more into a defined benefit plan.

If Katie had triggered the tapered annual allowance it's still possible to carry forward unused annual allowance from previous years to a year where the taper applies. However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.

The annual allowance acts like a cap on the amount of tax relief that can be received. The tax relief is capped by imposing an annual allowance charge on any contribution over the annual allowance available for the pension input period. The charge is calculated using the member's marginal rate of income tax, so it's designed to effectively remove the tax relief received on the contribution. This is done via Katie's tax return.

See our article on tax relief and the annual allowance for further details.

A: No, for defined benefit schemes the employer contribution can't be assessed for each individual as it's an amount paid to the scheme, not each member's 'pot', so contributions (including Lynn's) can't be used as the measure.

The pension input amount for defined benefit schemes is the value of benefits accrued over the pension input period. An example of the calculation can be found in ‘A pension input amount calculation for a defined benefit scheme’ section of this article.

A: A partnership can pay employer contributions for those who are employees (e.g. administration staff). They can deduct those contributions from the partnership's taxable profits.

The partners themselves aren't employees - they're self-employed. Any contributions are therefore member contributions.

A: No, it doesn't. Pension income is treated in the same way as investment income - it doesn't count as earnings. Only earnings such as salary, wages bonus, overtime, commission or self-employed earnings count.

See the ‘Earnings that attract tax relief’ section of this page of the Pensions Tax Manual.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 05 Apr 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.