HM Revenue and Customs (HMRC) manage pensions savings. There are two main allowances for pension, namely annual allowance, and lump sum allowance. The information below provides an overview of the rules governing pension savings taxation, the regulations are complex and the information below is summarised.
If you are unsure about the best action to take, it is recommended that you get expert financial advice and tax guidance as Gwynedd Pension Fund staff cannot provide this for you.
Annual Allowance
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Annual Allowance is the amount by which the value of your pension benefits can increase (pension savings) in any tax year without you having to pay tax. This is in addition to any income tax you pay on your pension once it is paid. The standard AA limit is set at £60,000 from April 2023, previously it was £40,000 from 2016 to April 2023.
If the total value of your Pension Savings in any tax year, including all Pension Savings in all pension schemes, exceeds the AA limit, the excess amount will be taxed as income at your highest marginal tax rate.
Most people will not be affected by the AA tax charge because the value of their pension savings will not increase in a year more than the AA, or, if so, they are likely to have an unused allowance from previous years that can be carried forward. With the carry forward rule it allows you to carry forward an unused annual allowance from the last 3 tax years. This means that you can look back at the last 3 tax years to see if you have any unused allowance from these years in which case you may be able to carry forward the unused allowance and add it to your annual allowance in the current tax year.
For example, if you exceeded the annual allowance of £10,000 in 2022/23 but had an unused annual allowance of £15,000 from the last 3 years, there would be no annual allowance tax charge to pay in this case. It is your responsibility to check if you have any unused allowance from the last 3 tax years to carry forward.
You are most likely to be affected if:
- You have a lot of service or pension in the Scheme and receive a substantial pay rise, or promotion, and/or;
- You are a high-income earner, and or;
- received flexible benefits from another pension scheme on or after 5 April 2015
Notice if:
You have exceeded your annual allowance and that you do not have sufficient unused annual allowance to carry forward the excess, you then have to declare this to HMRC on your Self-Assessment Tax Return – even if your scheme pays the tax charge.
If you have an annual allowance tax charge exceeding £2,000 and your pension savings in the scheme alone have increased during the tax year more than the annual allowance, you may be able to choose for the scheme to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits. This is known as ‘scheme pays’. If you need further information about this option and how it may affect your pension benefits, please contact us.
If you want the scheme to pay some or all of the annual allowance tax charge, you must report this to us no later than 31 July in the year following the end of the tax year to which the annual allowance tax charge relates. However, if you are retiring and eligible for all of your benefits from the plan and you want the plan to pay some or all of the tax on your part of your benefits, you have to tell us before you will be eligible for those benefits.
The Gwynedd Pension Fund will automatically notify you if your Pension Savings in this scheme exceed the standard AA limit in any tax year by 6 October by the latest in the following tax year.
Changes to LGPS revaluation date
In March 2023 the government changed the date for the revaluation of the Career Average Pension 1 April to 6 April. This and the revaluation of CARE LGPS benefits came in line with the Pension Input Period (PIP) used for annual allowance calculations.
The AA calculation measures the increase in pension benefits over the PIP. If growth exceeds the AA limit, then tax payouts may be payable.
There was a problem in that the increase in cost of living for 2022/23 of 3.1% was very different from the increase to be applied to CARE benefits of 10.1%. This could have caused many more people to break the AA limit and face tax charges. The change to the revaluation date was made to alleviate this problem.
Lifetime Allowance
From 6 April 2024, the UK Lifetime Allowance rules, which cap pension tax savings, have been repealed. There is no longer a limit to how much money you can save in your pension fund without facing additional tax payments.
Lump Sum Allowance
New lump sum allowances were introduced from 6 April 2024 – the lump sum allowance (LSA), lump sum and death benefits allowance (LSDBA) and Overseas Transfers Allowance (OTA).
The LSA is set at £268,275 and limits the amount of tax-free lump a person can take from all their pensions.
The LSDBA is set at £1,073,100 and limits the amount of tax-free amount lump that can be paid in respect of it when they die.
Overseas Transfer Allowance (OTA) - This limits the tax-free value of all transfers to Qualified Recognised Overseas Pension Schemes (QROPS) to £1,073,100
If you take a lump sum amount as part of your LGPS pension package, you will need to know how much Lifetime Allowance you used before 6 April 2024 as this will affect your available LSA and LSDBA.