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Pension input periods and pension input amounts
Both of these have been with us since 2006 but when the annual allowance reduced to £40,000 more people were affected. The subsequent increase to £60,000 has reduced the number of people impacted but it still remains an issue for some.
Key facts
Pension input period:
- This is the period of time used to measure contributions paid/benefits accrued for testing against the annual allowance, money purchase annual allowance or tapered annual allowance.
- The annual allowance used is the one that's in force at the end of the pension input period. A charge is levied if the annual allowance, money purchase annual allowance or tapered annual allowance available is exceeded at the end of the period.
- Pension input periods are aligned with the tax year.
Pension input amount:
- For defined contribution plans this is the amount of contributions made during the pension input period.
- For defined benefit schemes, the pension input amount is the value of benefits accrued over the pension input period.
- Transfers from other plans don't count towards this amount.
What is a pension input period?
A pension input period is the period of time used to measure contributions paid/benefits accrued for testing against the annual allowance, money purchase annual allowance or tapered annual allowance.
Since the summer Budget on 8 July 2015, pension input periods have been aligned with the tax year (6 April to 5 April).
It is not possible to change a pension input period.
For more information on the position before 8 July 2015 see our article Pension input periods and pension input amounts (pre 8 July 2015 rules).
HMRC Pensions Tax Manual - PTM052100: Pension input periods
What is a pension input amount?
The pension input amount for a defined contribution plan is the amount of contributions made during the pension input period.
For defined benefit schemes, the pension input amount is the value of benefits accrued over the pension input period.
Transfers from other plans don't count towards the pension input amount.
Note: Where an individual takes benefits as a result of:
- severe or serious ill-health,
- being a member of the UK armed forces who becomes entitled to benefits from the arrangement and those benefits are not taxable due to s641(1) Income Tax (Earnings and Pensions) Act 2003, or
- the individual dying,
no pension input amount will arise for pension input periods ending in the tax year in which any of these events happen.
HMRC Pensions Tax Manual - PTM053000: Pension input amounts
HMRC Pensions Tax Manual - PTM051200: When the annual allowance charge does not apply
A pension input amount calculation for a defined benefit scheme
Fred has 34 years of benefits accrued in a defined benefit scheme. The scheme provides a pension of 1/60 of pensionable salary for each year of pensionable service.
His pensionable salary is £36,000. In year 35 he gets a promotion and his new salary is £46,000. His pension input period ends on 5 April 2024.
| Step 1 | Calculate the opening entitlement. This is 34/60 x £36,000 = £20,400. Add any tax-free cash that is not paid by commutation. |
|---|---|
| Step 2 | Multiply the opening entitlement by 16. £20,400 x 16 = £326,400. |
| Step 3 | Revalue this amount by the increase in the CPI (the consumer prices index to the September before the start of the tax year in which the pension input period ends). If CPI was 10.1%, the up-rated value would be £326,400 x 1.101 = £359,366. |
| Step 4 | Calculate the closing entitlement. This is 35/60 x £46,000 = £26,833. Add any tax-free cash that is not paid by commutation. |
| Step 5 | Multiply the closing entitlement by 16. £26,833 x 16 = £429,328. |
| Step 6 | Calculate the difference between the revalued opening entitlement and the closing entitlement. This is £69,962 [£429,328 - £359,366]. |
In this example, Fred is over the annual allowance. He needs to tell HM Revenue & Customs (HMRC) he has exceeded the annual allowance through his tax return. The excess will suffer an annual allowance charge that will effectively remove all tax relief on the excess. If he has any unused annual allowance from previous years this can be carried forward to remove or reduce the annual allowance charge.
Why do pension input periods matter?
They matter because the pension input amount is measured against the annual allowance in force at the end of the pension input period.
If the money purchase annual allowance or tapered annual allowance applies the pension input amount is tested against the lower allowance.
If the pension input amount from all the individual's plans ending in that tax year is greater than the annual allowance available, an annual allowance charge is due. If the end of the pension input period is 5 April 2024 it will be tested against the 2023/24 limit of £60,000. The tax charge is at the individual's marginal rate of tax and will be dealt with through their tax return.
The steps for calculating the annual allowance charge and how to pay the annual allowance charge can be found in HMRC's pensions tax manual.
It's possible to carry forward unused annual allowance from previous pension input periods to increase the amount of annual allowance or tapered annual allowance available. You cannot use carry forward if the money purchase annual allowance applies.
How long does a pension input last for?
The pension input period lasts from the day the first regular or single contribution is paid to the plan and runs to the following 5 April. They then run in line with the tax year.
Disclaimer
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.