Pensions Tax

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Annual allowance examples

This guide provides examples of how to calculate your annual allowance 'pension' growth for protected members of the 1995/2008 sections and for those who have transitioned to the 2015 CARE scheme. The pensions agencies have also produced guidance and calculators which are available on their websites to help you estimate your growth.

Refer to the following pages if you are contributing to:

A recap

The Government gives tax relief on contributions to pension schemes and allows up to 25% of the benefits to be taken tax-free at retirement. Since 2006, there have been limits on the amount that can be contributed each year, and the total benefits an individual may build up over their career. Beyond these limits, tax charges apply. 

Broadly, these limits are as follows:


Annual allowance (AA)


This is the limit on the 'value' of pension benefit which can be earned each. For the 2018/19 tax year, the limit for those earning broadly less than £150,000 a year is £40,000. The tapered annual allowance for higher earners is as follows:

Adjusted income Annual allowance
£150,000  £40,000
£160,000 £35,000
£170,000 £30,000
£180,000 £25,000
£190,000  £20,000
£200,000 £15,000
£210,000 £10,000

More information on tapered annual allowance is provided below.

Lifetime allowance (LTA)

This is the limit on the maximum amount of benefits anyone can earn over their career. It currently stands at £1.03 million from April 2018, and is due to increase in line with the Consumer Prices Index (CPI) each April thereafter.

 

What is the limit for annual allowance?

For the 2018/19 tax year, the limit for those earning broadly less than £150,000 a year is £40,000.

For those with an annual income over £150,000 a lower tapered AA limit applies. However, the way 'income' is calculated means that anyone earning an annual income over £110,000 can also be affected. There are two important new definitions:


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.

Go to HMRC guidance


Adjusted income

Broadly threshold income plus pension savings (i.e. your taxable income plus your employer's share of your pension savings).

Limit: £150,000


The taper reduces the AA limit by £1 for every £2 of adjusted income received over £150,000, until a minimum AA limit of £10,000 is reached. This means that the AA for higher earners with threshold income higher than £110,000 is as follows:

(same as graph above).

 

It is also important not to forget the Money Purchase Annual Allowance (MPAA). If you 'flexible' access any defined contribution pension from another scheme, then your AA limit for the particular tax year reduces to £4,000.

Find out more information

Scheme pays

If your growth in the NHS Pension Scheme exceeds the annual allowance you will have to tell HMRC. You can then pay the charge directly to HMRC. Alternatively, you can ask NHS pensions to pay the charge on your behalf in exchange for a reduction in your benefits, using something called "Scheme Pays".

Find out more information on scheme pays:

Annual allowance - scheme pays facility
Annual allowance - scheme pays facility for transition members

The deadline for a scheme pays election is 31 July, following the January in which the annual allowance charge must be declared on your tax return.  For example, for the 2017/18 tax year, the deadline is 31 July 2019.

 

 

Examples

Please note: example calculations are intended to illustrate the method for calculating the annual allowance. This guide does not provide exhaustive examples or illustrate all types of pension growth, and in the case of the GP examples it has taken into account the 'flexibility tests' undertaken when the pensions agency tests for the annual allowance. 

The examples below illustrate the potential tax charges for doctors and GPs. The benefits provided by the different sections of the NHS Pension Scheme are described briefly below:

  • Hospital and Community doctors (1995 Section) provides benefits on a 1/80ths basis and cash at retirement of 3 times pension.
  • Hospital and Community doctors (2008 Section) provides benefits on a 1/60ths basis. HMRC have advised that no account is to be taken of the Mandatory Lump Sum for those who chose to switch from the 1995 Section to the 2008 Section.
  • GPs (1995 Section) provides benefits based on career earnings and a retirement lump sum of 3 times pension. Pension is based on 1.4% of "dynamised earnings". Pensionable earnings are recorded each year and a revaluation factor is applied. The revaluation factor used to re-value earnings each year is 1.5% above the Consumer Prices Index (“CPI”). The resulting figure is known as "dynamised earnings".
  • GPs (2008 Section) provides benefits based on career earnings. Pension is based on 1.87% of “dynamised earnings”.
  • The 2015 Scheme provides career average revalued earnings (CARE) benefits for all doctors. The accrual rate in the 2015 Scheme is 1/54 (equivalent to 1.85%), and the in-service revaluation rate is CPI plus 1.5%.

In each of the following examples, CPI over the relevant period has been assumed to be 2%. The dynamising factor (the factor used to re-value earnings for GPs) is assumed to be 3.5%.

  • 1995 section protected member and transition member examples

    Example 1a – Promotion from specialist registrar to consultant (Protected member)

    Andy is promoted from specialist registrar (SpR) to consultant and his pensionable salary increases from £47,132 to £77,913. He is a fully protected member in the NHS Pension Scheme (1995 Section) and has completed 20 years’ membership at the end of the Pension Input Period prior to the current one.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £47,132 x 20/80 = £11,783
    “Inflation proof” Pension = £11,783 x (1+2%) = £12,019
    Lump sum = 3 x £11,783 = £35,349
    “Inflation proof” Lump Sum = £35,349 x (1+2%) = £36,056

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£77,913 x 21/80) = £20,452
    Lump sum = 3 x £20,452 = £61,356

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£20,452 - £12,019) x 16 = £134,928
    Lump sum = (£61,356 -  £35,349) = £26,007
    Total change: £134,928 + £26,007 = £160,935

    Step 4:  Calculate threshold income, adjusted income, and Annual Allowance:
    As his taxable income is less than £110,000, Andy is not affected by Tapered AA and his Annual Allowance for the year is £40,000

    Step 5: Test against Annual Allowance: 
    Increase in growth from Step 3: £160,935
    Annual Allowance from Step 4: £40,000
    So, Annual Allowance exceeded by: £160,935 - £40,000 = £120,935

    Step 6: Carried forward Annual Allowance from previous 3 years: £50,000 (say)

    Step 7: Calculate any tax charge payable:
    Amount Annual Allowance exceeded by from Step 5: £120,935
    Carried forward Annual Allowance from Step 6: £50,000

    As £120,935 exceeds £50,000 by £70,935, Andy will have to pay tax on this amount at his marginal income tax rate. 

     


    Example 1b – Promotion from specialist registrar to consultant (Transition member)

    As per example 1a, except let’s now assume Andy transitioned to the 2015 Scheme in April 2017.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £47,132 x 10/80 = £5,892
    “Inflation proof” Pension = £5,892 x (1+2%) = £6,010
    Lump sum = 3 x £5,892 = £17,676
    “Inflation proof” Lump Sum = £17,676 x (1+2%) = £18,030

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£77,913 x 10/80) + (£77,913 x 1/54) = £9,739 + £1,443 = £11,182
    Lump sum = 3 x £9,739 = £29,217

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£11,182 - £6,010) x 16 = £82,752
    Lump sum = (£29,217 -  £18,030) = £11,187
    Total change: £82,752 + £11,187= £93,939

    Step 4: Calculate threshold income, adjusted income, and Annual Allowance:
    As his taxable income is less than £110,000, Andy is not affected by Tapered AA and his Annual Allowance for the year is £40,000

    Step 5: Test against Annual Allowance: 
    Increase in growth from Step 3: £93,939
    Annual Allowance from Step 4: £40,000
    So, Annual Allowance exceeded by: £93,939 - £40,000 = £53,939

    Step 6: Carried forward Annual Allowance from previous 3 years: £50,000 (say)

    Step 7: Calculate any tax charge payable:
    Amount Annual Allowance exceeded by from Step 5: £53,939
    Carried forward Annual Allowance from Step 6: £50,000

    As £53,939 exceeds £50,000 by £3,939, Andy will have to pay tax on this amount at his marginal income tax rate. 



    Example 2a: Senior Consultant (Protected member)

    Jack is a Senior Consultant with a salary of £105,042, a Level 8 CEA (£30,160) and is a fully protected member of the 1995 Section of the NHS Pension Scheme. He has been a member of the Scheme for the past 30 years. In the 2017/18 tax year, he is awarded a Level 9 CEA (£36,192) and his earnings therefore increase from £135,202 to £141,234.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £135,202 x 30/80 = £50,701
    “Inflation proof” Pension = £50,701 x (1+2%) = £51,715
    Lump sum = 3 x £50,701 = £152,103
    “Inflation proof” Lump Sum = £152,103 x (1+2%) = £155,145

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£141,234 x 31/80) = £54,728
    Lump sum = 3 x £54,728 = £164,184

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£54,728 - £51,715) x 16 = £48,208
    Lump sum = (£164,184 -  £155,145) = £9,039
    Total change: £48,208 + £9,039 = £57,247

    Step 4: Calculate employer share of this total increase in value:
    Member contributions in the year = 14.5% x £135,202 = £19,604
    Employer share of increase in value of pension = £57,247 - £19,604 = £37,643

    Step 5:  Calculate threshold income, adjusted income, and Annual Allowance:
    Threshold Income = £135,202 - £19,604 = £115,598. This is greater than £110,000, so Jack is affected by Tapered AA.
    Adjusted Income = £135,202 + £37,643 = £172,845. This is greater than £150,000, so Jack’s annual allowance will be reduced.
    Annual Allowance: £40,000 - (£172,845 - £150,000)/2 = £40,000 - £11,423 = £28,577

    Step 6: Test against Annual Allowance: 
    Increase in growth from Step 3: £57,247
    Annual Allowance from Step 5: £28,577
    So, Annual Allowance exceeded by: £57,247 - £28,577 = £28,670

    So, unless Jack has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.   

     


    Example 2b – Senior Consultant (Transition member)

    As per example 2a, except let’s now assume Jack transitioned to the 2015 Scheme in April 2017.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £135,202 x 30/80 = £50,701
    “Inflation proof” Pension = £50,701 x (1+2%) = £51,715
    Lump sum = 3 x £50,701 = £152,103
    “Inflation proof” Lump Sum = £152,103 x (1+2%) = £155,145

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£141,234 x 30/80) + (£141,234 x 1/54) = £52,963 + £2,615 = £55,578
    Lump sum = 3 x £52,963 = £158,889

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£55,578 - £51,715) x 16 = £61,808
    Lump sum = (£158,889 -  £155,145) = £3,744
    Total change: £61,808 + £3,744 = £65,552

    Step 4: Calculate employer share of this total increase in value:
    Member contributions in the year = 14.5% x £135,202 = £19,604
    Employer share of increase in value of pension = £65,552 - £19,604 = £45,948

    Step 5:  Calculate threshold income, adjusted income, and Annual Allowance:
    Threshold Income = £135,202 - £19,604 = £115,598. This is greater than £110,000, so Jack is affected by Tapered AA.
    Adjusted Income = £135,202 + £45,948 = £181,150. This is greater than £150,000, so Jack’s annual allowance will be reduced.
    Annual Allowance: £40,000 - (£181,150 - £150,000)/2 = £40,000 - £15,575 = £24,425

    Step 6: Test against Annual Allowance: 
    Increase in growth from Step 3: £65,552
    Annual Allowance from Step 5: £24,425
    So, Annual Allowance exceeded by: £65,552 - £24,425 = £41,127

    So, unless Jack has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.   

  • 2008 section protected member and transition member examples

    Example 3a: Consultant who receives an increment (Protected member)

    Karen is a Consultant with a salary of £93,459 and is a fully protected member of the 2008 Section of the NHS Pension Scheme.  She has been a member of the Scheme for the past 30 years.  At the end of the period she receives an increment pay rise, giving her a pensionable salary of £99,254.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £93,459 x 30/60 = £46,730
    “Inflation proof” Pension = £46,730 x (1+2%) = £47,665

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£99,254 x 31/60) = £51,281

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£51,281 - £47,665) x 16 = £57,856

    Step 4:  Calculate threshold income, adjusted income, and Annual Allowance:
    As her taxable income is less than £110,000, Karen is not affected by Tapered AA and her Annual Allowance for the year is £40,000

    Step 5: Test against Annual Allowance: 
    Increase in growth from Step 3: £57,856
    Annual Allowance from Step 4: £40,000

    So, Annual Allowance exceeded by: £57,856 - £40,000 = £17,856

    So, unless Karen has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at her marginal income tax rate.   

     


    Example 3b: Consultant who receives an increment (Transition member)

    As per example 3a, except let’s now assume Karen transitioned to the 2015 Scheme in April 2017.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = £93,459 x 30/60 = £46,730
    “Inflation proof” Pension = £46,730 x (1+2%) = £47,665

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Pension = (£99,254 x 30/60) + (£99,254 x 1/54) = £49,627 + £1,838 = £51,465

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£51,465 - £47,665) x 16 = £60,800

    Step 4:  Calculate threshold income, adjusted income, and Annual Allowance:
    As her taxable income is less than £110,000, Karen is not affected by Tapered AA and her Annual Allowance for the year is £40,000

    Step 5: Test against Annual Allowance: 
    Increase in growth from Step 3: £60,800
    Annual Allowance from Step 4: £40,000

    So, Annual Allowance exceeded by: £60,800 - £40,000 = £20,800

    So, unless Karen has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at her marginal income tax rate.   

     


    Example 4a – Self-employed GP (Protected Member)

    Sam is a self-employed GP with a pensionable salary of £150,000 and £2.7m dynamised earnings. He is a fully protected member of the 2008 Section of the NHS Pension Scheme.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = 1.87% x £2,700,000 = £50,490
    “Inflation proof” Pension = £50,490 x (1+2%) = £51,500

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Dynamised earnings = £2,700,000 x (1+3.50%) + £150,000 = £2,944,500
    Pension = £2,944,500 x 1.87% = £55,062

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£55,062 - £51,500) x 16 = £56,992

    Step 4: Calculate the employer’s share of this total increase in value:
    Member contributions in the year = 14.5% x £150,000 = £21,750.
    Employer’s share of increase in value of pension = £56,992 - £21,750 = £35,242

    Step 5:  Calculate threshold income, adjusted income, and Annual Allowance:
    Threshold income = £150,000 - £21,750 = £128,250.  This is more than £110,000, so Sam is affected by Tapered AA. 
    Adjusted income = £150,000 + £35,242 = £185,242. This is higher than £150,000, so Sam’s Annual Allowance will be reduced.
    Annual Allowance = £40,000 – (£185,242 – £150,000)/2 = £40,000 - £17,621 = £22,379

    Step 6: Test against Annual Allowance: 
    Increase in growth from Step 3: £56,992
    Annual Allowance from Step 5: £22,379

    So, Annual Allowance exceeded by: £56,992 - £22,379 = £34,613

    So, unless Sam has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.   

     


    Example 4b – Self-employed GP (Transitional Member)

    As per example 4b, except let’s now assume Sam transitioned to the 2015 Scheme in April 2017.

    Step 1: Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”: 
    Pension = 1.87% x £2,700,000 = £50,490
    “Inflation proof” Pension = £50,490 x (1+2%) = £51,500

    Step 2: Calculate pension benefit at the end of the current Pension Input Period: 
    Dynamised earnings = £2,700,000 x (1+3.50%) = £2,794,500
    Pension = £2,794,500 x 1.87% + (£150,000 x 1/54) = £52,257 + £2,778 = £55,035 

    Step 3: Calculate increase in pension benefit value over the Pension Input Period: 
    Pension = (£55,035 - £51,500) x 16 = £56,560

    Step 4: Calculate the employer’s share of this total increase in value:
    Member contributions in the year = 14.5% x £150,000 = £21,750.
    Employer’s share of increase in value of pension = £56,560 - £21,750 = £34,810

    Step 5:  Calculate threshold income, adjusted income, and Annual Allowance:
    Threshold income = £150,000 - £21,750 = £128,250.  This is more than £110,000, so Sam is affected by Tapered AA. 
    Adjusted income = £150,000 + £34,810 = £184,810. This is higher than £150,000, so Sam’s Annual Allowance will be reduced.
    Annual Allowance = £40,000 – (£184,810 – £150,000)/2 = £40,000 - £17,405 = £22,595

    Step 6: Test against Annual Allowance: 
    Increase in growth from Step 3: £56,560
    Annual Allowance from Step 5: £22,595

    So, Annual Allowance exceeded by: £56,560 - £22,595 = £33,965

    So, unless Sam has any unused allowances from the previous 3 tax years, income tax will be payable on this figure at his marginal income tax rate.