The Annual Allowance
Income tax returns, starting with the year to 5 April 2007, cover
pensions. Any taxpayer whose pension savings have exceeded the Annual
Allowance must report this to HMRC through the self-assessment
process.
What is the Annual Allowance?
The Annual Allowance is the total amount you are allowed to put into
tax-relieved pension saving in the “input period” ending in a tax year
without having to pay any extra tax. For occupational pensions (such
as classic, classic plus and
premium), the “amount put in” is a notional amount
equivalent to 10 times the increase in annual pension plus the increase in
any automatic lump sum (this does not apply in
premium). For the tax year 2006/7 the Annual
Allowance is £215,000.
For money purchase pensions, such as AVCs, partnership
pension account or personal pensions, the “amount put in” is the actual
amount you saved.
What is the input period?
The Cabinet Office, as managers of the Civil Service pension scheme, have
set the input period for this scheme as the period ending 31
December. For the tax year 2006/7 (the first year of the new
tax arrangements), the input period is therefore the period from 6
April 2006 to 31 December 2006 (in subsequent years, the input
period will be the full year from 1 January to 31 December).
You may be able to set your own input period for money purchase
pensions. If the Annual Allowance is an issue for you, you should
consider taking independent advice on this point.
How do I tell if I am affected?
The people typically at risk are:
-
high earners who have long service and who have a significant pay rise
during the year (see Example 1 below) ;
-
people who move to a new job on promotion and have a “Club” transfer of
previous benefits (see Example 2 below);
-
people re-employed at a much higher salary than before, and who aggregate
a long period of earlier service (see Example 3 below) ; and
-
people making very large contributions to money purchase pensions
What happens if I am over the Annual Allowance?
Any excess over the Annual Allowance is subject to income tax at 40%.
Does the Annual Allowance always apply?
The Annual Allowance does not apply to any pension benefits in the year
when you have both retired and taken your full benefits on
retirement. The Annual Allowance also does not apply if you have
applied for
Enhanced Protection for your pension benefits.
What do I need to do now?
If you think that you might be close to or over the Annual Allowance, you
must ask your pension administrator (APAC) for an Annual Allowance
statement. You will also need to get information from any other
pension provider (for instance, if you are paying into a personal pension
or AVC).
If you think you are over the Annual Allowance, you may wish to check
matters with an independent adviser before submitting your Self Assessment
tax return. High earners or their advisers can also email LTA@cabinet-office.x.gsi.gov.uk
with questions about the Civil Service pension arrangements.
Examples
Example 1 (significant promotion)
Ann is promoted to Permanent Secretary on a salary of £160,000. Ann’s
previous salary as a Director-General was £120,000. Ann has 35 years’
service at 31 December (34.25 years at 6 April) and is not subject to the
earnings cap. Ann is in premium.
Ann’s premium pension at 31 December = £160,000 x 35/60 =
£93,333
Ann’s premium pension at 6 April = £120,000 x 34.25/60 =
£68,500
Increase in Ann’s pension = £93,333 - £68,500 = £24,833
For tax purposes, the increase in Ann’s pension benefits
= £24,833 x 10 = £248,330
Ann has exceeded the Annual Allowance by £33,330 and she must declare this
on her tax return, together with any sums paid into a personal pension or
AVC. Ann will pay tax at 40% on this amount.
Example 2 – Club transfer
Rodney joins the Civil Service on 1 July 2006 on a salary of
£150,000. His employer makes a business case for this all to be
pensionable. Rodney joins from the private sector but
brings in a Club transfer from an earlier period of service in the
LGPS. This buys him 19.5 years service in the Civil Service
scheme. The value of Rodney’s preserved LGPS benefits, before the
Club transfer, was a pension of £20,000 and a lump sum of £60,000.
Rodney’s premium pension at 31 December = £150,000 x 20/60 = £50,000
Rodney’s benefits at 5 April (in LGPS) = pension of £20,000 + lump sum of
£60,000
The tax value of Rodney’s benefits at 31 December = £50,000 x 10 = £500,000
From this, we deduct the value of benefits transferred from LGPS
= £20,000 x 10 + £60,000 = £260,000
So, the tax value of the increase in Rodney’s Civil Service pension
benefits
= £500,000 - £260,000 = £240,000
Rodney has exceeded the Annual Allowance by £25,000 and he must declare
this on his tax return, together with any sums paid into a personal pension
or AVC and any increase associated with any pension he earned during the
period before joining the Civil Service . Rodney will pay tax at 40%
on this amount.
Example 3 (re-employment and aggregation)
George rejoined the Civil Service on 1 July 2006 as Chief Executive of an
Agency. He earns £180,000 but, for pension purposes this is
restricted to the “earnings cap” of £108,600. On rejoining and going
into premium, George opted to “aggregate” an earlier
period of 29.5 years’ service with his current period of service (0.5 years
at 31 December 2006). George’s preserved pension (from his 29.5
years’ service) was £30,000pa.
George’s premium pension at 31 December = £108,600 x 30/60 = £54,300
George’s deferred pension at 6 April = £30,000
Increase in George’s pension = £54,300 - £30,000 = £24,300
For tax purposes, the increase in George’s pension benefits
= £24,300 x 10 = £243,000
George has exceeded the Annual Allowance by £28,000 and he must declare
this on his tax return, together with any sums paid into a personal pension
or AVC. George will pay tax at 40% on this amount.
