Answers to common queries on the Annual Allowance including how much it is, how to calculate it, where there are exemptions and other issues.
What is the BMA doing about the annual allowance
Since August 2018 we have made concerted efforts to secure urgent mitigations from the Government in order to prevent a workforce crisis. Whilst, as a result of these efforts the pensions taxation issue is now firmly on the Government’s radar, progress on urgent solution to the problem have been slow.
As we enter a new tax year, the BMA aims to support its members by ensuring that they are aware of the tax implications of the annual allowance and by giving them the tools to assess the impact of their personal situation.
In addition, more than 1,000 doctors have written to their local MP using a BMA tool to outline their own individual circumstances and concerns. This has helped to influence parliamentary debates and has been raised during Prime Minister’s Question Time. Yet our fears, and the fears of our members over the consequences to the sustainability of the NHS have not been fully appreciated and the solutions presented in our latest letter to the Treasury have gone unanswered.
To this end the BMA has published guidance outlining arrangements and possible alternative options for those who are active members of the NHS Pension Scheme and who may become affected by the lifetime allowances in respect of their pension savings in registered pension schemes in the UK.
Read the guidance
What is the Annual Allowance?
The Annual Allowance is a threshold which restricts the amount of pension growth you are allowed each year before tax charges apply. Where your pension growth exceeds the threshold the charge is intended to recover tax relief received on the contributions you have paid.
The Annual Allowance applies to all your benefits in registered pension schemes.
When was the Annual Allowance introduced?
It was introduced on 6 April 2006, which is known as 'A' day.
How much is the Annual Allowance?
In April 2006 the Annual Allowance was set at £215,000. It was scheduled to increase each year and did so until 2010-2011.
Tax year Rate of Annual Allowance
2015-2016: £80,000 (Transitional Arrangements apply)*
2016–2017: £40,000 (Tapered for high earners)
2017–2018: £40,000 (Tapered for high earners)
2018-2019: £40,000 (Tapered for high earners)
2019-2020: £40,000 (Tapered for high earners)
*In order to bring the scheme year into alignment with the tax year the 2015/16 year is split into a pre alignment period (1 April 2015 to 8 July 2015) and a post alignment period (9 July 2015 to 5 April 2016). The Annual Allowance for the pre alignment period is £80,000. The Annual Allowance for the post alignment period is £0. You can carry up to £40,000 of unused allowance from the pre alignment period to the post alignment period.
The standard Annual Allowance remains at £40,000. However, from April 2016 this can be reduced dependent on the level of your threshold income and your adjusted income. This is known as the Tapered Annual Allowance which affects high earners. High earners are those with taxable income from any source which exceeds £150,000. For each £2 that your adjusted income exceeds £150,000 you will lose £1 from your Annual Allowance. If your adjusted income is more than £210,000 you will have a personal Annual Allowance of £10,000 only. Your Annual Allowance cannot reduce to lower than £10,000 on account of this tapering. The assessment of whether you are subject to the Tapered Annual Allowance is complex and requires the calculation of threshold income first. If your threshold income exceeds £110,000 then an assessment of adjusted income needs to be made to check whether you are subject to the taper.
You may be subject to the Money Purchase Annual Allowance (MPAA) if you have drawn down from a defined contribution fund (such as a personal pension plan or AVC arrangement). The MPAA is £4,000 from 6 April 2017.
What is threshold income?
Broadly this is your gross income from all sources on which income tax is chargeable less the amount of any relief available under the provisions of the Income Tax Act 2007, which includes pension contributions and charitable deductions.
HMRC have provided guidance to assist you to calculate your threshold income.
What is adjusted income?
Broadly, this is your threshold income plus your pension growth.
Who calculates my threshold income and adjusted income?
You are responsible for calculating your threshold income and your adjusted income. If you are unable to do this you may wish to speak to your IFA or your accountant. You should speak to a professional adviser who is qualified to give this type of advice. You may find the following guidance helpful:
How is my NHS pension tested against the Annual Allowance?
High earners will initially need to have followed the guidance above to establish the level of Annual Allowance they have. Then the growth in your NHS pension over a pension input period is tested against this limit. From 1 April 2011 to 31 March 2015 the pension input period for the NHS pension scheme ran from 1 April to 31 March. In 2015/16 two pension input periods (pre and post alignment) were applied covering the period from 1 April 2015 to 5 April 2016. From April 2016 the pension input period runs from 6 April to 5 April.
Pension growth is determined by calculating the value of the NHS benefits at the beginning and the end of the pension input period. The benefits at the beginning of the pension input period are increased under the Pensions (Increase) Act 1971, currently linked to the Consumer Prices Index (CPI), to reflect their current value at the end of the pension input period.
The difference between these figures is the growth in the pension (and the growth in the lump sum, where applicable).
From April 2011, the test relates to the growth in your NHS pension multiplied by a factor of 16 added to the growth in your NHS lump sum. Your growth is the difference between the opening and the closing balance.
If you have moved to the 2008 section as result of the NHS Choice exercise your benefits are tested before converting some of the pension to provide the mandatory lump sum.
If you have transitioned to the 2015 scheme and have retained a 'final salary linking' to your 1995 or 2008 section benefits then several calculations will need to be undertaken as the 1995 or 2008 section benefits continue to grow via continued dynamising or linking to your current final salary. This link is only lost where you have a break in service of 5 years or more.
Whilst you are in pensionable NHS employment the Annual Allowance test is based on your accrued benefits with no account taken of any actuarial reduction that could apply if you were to access the benefits.
However, when tested at retirement the test will be applied against the benefits which are put into payment, taking account of the effects of actuarial reductions or late retirement enhancements.
For doctors with MHO status the calculation of your NHS service will include your doubled years.
I am buying added years or additional pension. Will these contributions be included in my pension growth?
Yes. If you are buying added years or additional pension by regular deduction from pay your growth will include the proportion of added years or additional pension purchased during the pension input period.
If you have purchased additional pension by lump sum the full amount purchased will be included as pension growth during the pension input period. This will also be the case if your employer purchases additional pension on your behalf.
I am buying the early retirement reduction buy out (ERRBO). Will these contributions be included in my pension growth?
No. If you are buying the ERRBO this will not affect the growth of your NHS pension as it does not enhance your annual accrual but looks to minimise/negate the actuarial reduction that would otherwise apply on retirement from the 2015 scheme from age 65 onwards for those with a State Pension Age greater than this.
How can I calculate my Annual Allowance growth?
The BMA guide, Restricting Pensions Tax Relief helps you calculate your liability. The pensions agencies have also produced guidance and calculators which are available on their websites (see bottom of this page) to help you estimate your growth.
Refer to the following pages if you are contributing to :
What happens if my pension growth is greater than the Annual Allowance?
If you are subject to the standard Annual Allowance of £40,000 and your pension growth is £65,000, then £25,000 may be subject to tax. However, you may be able to use carry forward (unused Annual Allowance from up to 3 previous years) to reduce or eliminate any growth over the limit and therefore offset any potential charge.
Any excess growth remaining after using available carry forward allowances needs to be added to your taxable income and will be taxable at your marginal rate.
What is carry forward?
If your pension growth exceeds the Annual Allowance or Tapered Annual Allowance in any one year you can "look back" up to three previous tax years to see if you have any unused allowance from these years. The maximum amount that can be carried forward is £50,000 for tax years from 2008/9 to 2013/14 and £40,000 for tax years after that and is calculated on the current Annual Allowance rules.
If you are subject to the taper you can only carry forward unused allowance from a tapered year up to the tapered amount (not up to the standard limit of £40,000). For example if your Tapered Annual Allowance is £20,000 and you have pension growth of £11,000 you would be able to carry forward £9,000 only.
You can carry forward from up to three previous years when you were an active, deferred, pensioner or a pension credit member of the scheme.
This means that if your pension growth exceeds the Annual Allowance or Tapered Annual Allowance threshold in any one year, you may not have any extra tax to pay, depending upon your ability to carry forward.
The carry forward rule is particularly helpful if you experience an increase in your earnings due to a promotion or clinical excellence award.
If you are a consistently high earner with a long service history, your pension growth might be consistently high meaning that you have very little capacity to carry forward.
How do I pay the tax charge?
If the tax charge amounts to less than £2,000 you will need to pay this on your self assessment tax return.
Read further information on this option
If the tax charge amounts to more than £2,000 then you can either pay the charge on your self assessment tax return or choose the 'scheme pays' option.
What is the 'scheme pays' option?
Providing you have not retired, if you have a tax charge of £2,000 or more you can request the pension scheme to pay your tax charge.
Those subject to the Tapered Annual Allowance can only use the scheme pays facility to pay a charge of £2,000 or more in respect of any excess that exceeds the Standard Annual Allowance of £40,000. If your Tapered Annual Allowance is £10,000, for example, and the growth in benefits is £40,000 resulting in an excess of £30,000 scheme pays will not meet any charge arising from this as the growth has not exceeded the Standard Annual Allowance. You may be able to apply for Voluntary scheme pays to meet charges below the standard Annual Allowance.
Will my scheme administrator automatically notify me of my pension growth if I am subject to the Tapered Annual Allowance?
No. This is because schemes have no way of knowing what your tapered allowance is. If you are subject to the standard Annual Allowance the pensions agencies will notify you automatically if your pension growth exceeds the threshold. If you are subject a reduced Annual Allowance on account of taper then you will need to request a pension growth statement to check your position.
What about my contributions to other pension arrangements?
Your total pension savings are subject to the Annual Allowance test so any contributions you pay to other registered pension schemes will also need to be included when calculating how much your pension has grown by in any one year.
Please note that whilst in a defined benefit scheme (such as the NHS pension scheme) it is your pension growth that is tested against the Annual Allowance, in a defined contribution scheme (such as a personal pension plan) it is your gross pension contributions which are tested against the Annual Allowance.
Your total pension growth is your pension growth from your defined benefit arrangement added to your gross contributions to your defined contribution arrangements.
Transitional members who moved to the 2015 scheme will need to account for any growth in their 1995 or 2008 section benefits as well as in the 2015 scheme.
What happens if I retire during the pension input period?
If you retire during the pension input period then your benefits will be tested against the Annual Allowance or Tapered Annual Allowance to establish pension growth from the start of the pension input period until your date of retirment.
You are still able to uplift the opening balance by the full pensions increase applicable in the year you retire. It will not be pro-rated on account of your retirement taking place during the pension input period.
What happens if I have chosen to commute pension for additional lump sum?
The Annual Allowance calculation is undertaken with reference to your pre-commutation benefits.
What happens if I take voluntary early retirement?
If you retire on the grounds of voluntary early retirement the actuarially reduced benefits are used to calculate your closing balance.
What happens if I retire later and am subject to a late retirement enhancement?
If you are an active member of the 2008 section or 2015 scheme retiring later than normal pension age/state pension age your benefits will be actuarially enhanced. The actuarially enhanced benefits are used to calculate your closing balance.
What happens if I am being made redundant?
If you retire on the grounds of redundancy then your benefits will be tested in the usual way.
If you claim actuarially reduced benefits the reduced benefits are used to calculate your closing balance.
If you claim unreduced benefits as a result of giving up some or all of your redundancy payment the unreduced benefits are used to calculate your closing balance.
The redundancy payment is not included in the Annual Allowance test.
What happens if I am retiring on ill health grounds?
If you retire on ill health grounds you are not automatically excluded from the Annual Allowance test. You are more likely to exceed the threshold if you are awarded Tier 2/Upper Tier ill health retirement benefits due to the enhanced pension payable.
HMRC have stated that their "severe ill health" test must be met in order for an individual to be exempt from the Annual Allowance charge in the year that they retire on ill health grounds. Although the NHS pension scheme Tier 2/Upper Tier requirements do not automatically mean that you satisfy this rule, if you are suffering from ill health rendering you unlikely to be able to undertake gainful work (in any capacity) at any time in the future (otherwise than to an insignificant extent) up to State Pension Age the scheme medical advisers can confirm this to enable you to be exempt from any Annual Allowance charge.
If you are terminally ill you will satisfy the "severe ill health" test and the scheme medical advisers will confirm this to enable you to be exempt from any Annual Allowance charge.
Please refer to the ill health retirement FAQ for further information on the enhancement and severe ill health test.
Are there certain points in my career when I might be vulnerable to breaching the Annual Allowance?
You may be more likely to exceed the Annual Allowance if you:
- have long service in the NHS pension scheme
- you are promoted
- receive an increment or a significant increase in pensionable profits (for GPs)
- successfully apply for CEAs or discretionary points
- are buying added years or additional pension
- have MHO status and your service is doubling
- retire on health grounds with a Tier or /Upper Tier award
If I receive pay arrears how will this affect the Annual Allowance calculation?
HMRC has indicated that they will treat any arrears of pay as pension growth in the year that the payment is received. In practice, however, your employer should notify the pensions agency as to which year the income should correctly have been received as this will ensure that any Annual Allowance calculations are corrected.
Read more about this
Are there any exemptions from the Annual Allowance?
The Annual Allowance charge will not apply on death, terminal ill health retirement or if the HMRC's severe ill health test (detailed above) is met.
Where can I find out more information on the Annual Allowance?
HM Revenue and Customs - Annual Allowance calculator
Department for Work and Pensions
Scottish Public Pensions Agency
Annual Allowance provisional Pension Saving Statements for GPs
NHS Pensions Agency (England and Wales) provided Provisional Pensions Savings Statements for the 2012/2013 tax year to those GPs who, based on estimated earnings, exceeded the £50,000 Annual Allowance limit (which applied in that year) on pension growth within the NHS Pension Scheme.
The difference between estimated pay and final certified pay can be significant and in over 90% of cases the estimated tax liability provided in the Provisional Pensions Savings Statements was incorrect.
The NHS Pensions Agency recently advised us that they intended to cease producing Provisional Pensions Savings Statements henceforth, given the almost guaranteed inaccuracy of the information it was hard to question this decision.
In future Pensions Savings Statements will be issued on receipt of your final certified pay by the NHS Pensions Agency. This is in line with HMRC's Annual Allowance requirements.
Ultimately what members want is to be able to estimate what their pensions growth will be year on year. The statements you were sent clearly don't allow you to do that accurately so we recommend that you consider using the previous year's details as a starting point. Your accountant is best placed to estimate your likely income.