Pensions and tax

Annual Allowance

Annual Allowance is the maximum amount of pension saving that benefits from tax relief. This includes the growth in pension accrual from defined benefit schemes such as Classic, Classic Plus, Premium and Nuvos and actual contributions made by you and your employer to a defined contribution scheme (such as a Partnership Pension Account or in house AVC's with Scottish Widows or Standard Life).

The annual allowance limit was £40,000 in 2022-23 and increased to £60,000 from the year 2023-24.

For a small number of high earners the standard Annual Allowance is reduced on a tapered basis, (applicable from the 2016-17 year). This was where their threshold income, which is broadly net income before tax (excluding pension contributions) exceeds the threshold income of £200,000 pa (rate applicable from the 2020-21 tax year). If you think that a tapered Annual Allowance may apply to you then further guidance is available on request from memberships@jss.ukri.org.

Although potentially anyone could breach the Annual Allowance, there are groups of members that may be more at risk than others:

• Certain pay/salary levels (based on the £60,000 Annual Allowance) for example Nuvos members earning over £163,000 and Classic, Classic Plus and Premium members with salaries exceeding £120,000 but this will also depend on how much reckonable service is accrued
• Individuals who receive a significant pay increase
• Ill health retirement with enhanced service (serious ill health commutation is not affected)
• Using compensation lump sum to buy added pension
• Buying added pension
• Those with other pension savings
• Those who link previous service
• Those who transfer in pension benefits under the Public Sector Transfer Club arrangement

Tax is the member's responsibility and this tax charge is administered through Self-Assessment with HM Revenue & Customs. HMRC provide comprehensive Self Assessment - external link - guidance on their website.

The real growth of the pension over the year is known as the Pension Input Amount.

Calculating the Annual Allowance input amount

The Pension Input Period (PIP) runs for a year. It was aligned to the tax year 6 April to 5 April for all pension schemes from the 2016-17 tax year. Prior to this the PIP for the Research Councils' Pension Scheme (RCPS) was from 1 January to 31 December.

To calculate the Pension Input Amount for the PIP, the following elements are used:

1. Value of the benefits as at the start of the PIP, increased in line with CPI for inflation
2. Value of the benefits as at the end of the PIP
3. Contributions to a defined contribution pension; e.g. Partnership or AVCs to Scottish Widows or Standard Life

The Pension Input Amount is (B) + (C) - (A). As pensions are in pay for the members' lifetime the increase in the annual pension is multiplied by a factor of 16 to provide the real growth in the pension saving.

The Partnership Pension Account is a defined contribution arrangement, also known as 'money purchase'. The amount of Annual Allowance used is simply the total amount of contributions during the PIP.

Example of Annual Allowance - Classic, no promotion

The Pension Input Amount is (16 x £687) + £2,331 = £13,323. The growth of the pension is within the Annual Allowance limit.

Example of Annual Allowance - Premium, with promotion

The Pension Input Amount is (16 x £4,976) = £79,616. The growth of the pension is over the 2023-24 Annual Allowance limit by £19,616.

Example of Annual Allowance - Nuvos

The Pension Input Amount is (16 x £1,676) = £26,816. The growth of the pension is within the Annual Allowance limit.

Members can automatically carry forward any unused Annual Allowance from the previous three PIP years. There is no need to make any claim to HMRC to carry forward unused Annual Allowance and it does not need to be shown on your tax return if using the unused Annual Allowance means the limit is not exceeded.

Pension Annual Allowance Calculator

HMRC have made a calculator available to check if you have an annual allowance tax charge on your pension savings. The calculator can be found on the HMRC website - external link.

Pension Saving Statements

Pension schemes have a statutory obligation to provide a Pension Savings Statement by 6 October each year to anyone who has exceeded the Annual Allowance limit in the previous PIP. Schemes also have an obligation to provide a statement on request at any other time. To request one please contact us.

It is the individual's responsibility to inform HMRC when they exceed the limit, which is done through Self Assessment. If the member has a tax charge, the excess, after offsetting unused allowance, must be added to their taxable income and reported to HMRC.

If the tax charge exceeds £2,000, members may be able to pay the charge via Scheme Pays, otherwise they will need to pay the Annual Allowance tax charge directly to HMRC through Self Assessment.

Under the Scheme Pays facility, JSS can pay the tax charge by permanently reducing the pension scheme benefits. There are two forms of Scheme Pays:

Mandatory Scheme Pays can be used if your Pension Input Amount for the RCPS is in excess of £60,000, (from the 2023-24 year) you do not have enough unused allowance from the previous three years, and the tax charge resulting from the excess is over £2,000. For the 2023-24 year, the tax charge payment must be made to HMRC by 14 February 2026.

Voluntary Scheme Pays can be used if the Mandatory Scheme Pays criteria is not met. For the 2023-24 year, the tax charge payment must be made to HMRC by 31 January 2025. If paid late, HMRC may impose a late payment charge. Under Voluntary Scheme pays, any such charge would not be paid by the RCPS.

If you have exceeded the Annual Allowance and require a Scheme Pays quote, a Scheme Pays quote request form can be found on the Guides and Forms page.

More information can be found about paying the tax charge on the HMRC Website - external link.

Lifetime Allowance

The Lifetime Allowance (LTA) was the maximum overall value of pension benefits (excluding state pensions) that an individual could build up over their lifetime before a tax charge was due.

The LTA since 2021-22 was £1,073,100. The Government removed the LTA with effect from 6 April 2023 and it was fully abolished from the 2024-25 tax year, through a Finance Bill, from which point, a limit on the maximum tax-free lump sum accessible from pension schemes applies. The limit is known as the Lump Sum Allowance. If certain LTA protections are held, the amount of tax-free lump sum may be affected.

It may still be possible to apply for certain LTA Protections, on the Government website - external link.

Lump Sum Allowance

This is the total amount of tax-free cash an individual can receive across all pension schemes. The current overriding total LSA limit is £268,275. Any tax-free lump sum benefits paid before 6 April 2024 count towards the LSA. Therefore if any lump sum exceeds your available LSA, we may need to limit the amount of lump sum that we can pay.

All pension administrators are required to carry out a LSA 'test' when a relevant benefit crystallisation event takes place. A relevant benefit crystallisation event is when pension benefits are accessed and a tax-free lump sum may be payable.

When accessing a tax-free lump sum from a JSS administered Scheme, individuals will need to complete a Lump Sum Allowance Declaration form providing evidence of the amount of Lifetime Allowance used up in relation to benefits accessed pre-6 April 2024. If a tax-free lump sum has been accessed post-6 April 2024, evidence of the remaining LSA (and LSDBA) will need to be provided.

If a tax-free lump sum was accessed prior to 6 April 2024 and it did not represent the maximum tax-free lump that could have been accessed, individuals may want to consider applying for a Transitional Tax-Free Amount Certificate.

An individual may apply for a certificate from any registered pension scheme they are a member of. Individuals may wish to apply to the registered pension scheme under which they crystallised the majority of their pension benefits prior to 6 April 2024, or under which they expect to have their first relevant benefit crystallisation event after this date.

If applying to JSS for a Transitional Tax-Free Amount Certificate, a clear written application will be required, otherwise, in assessing the remaining LSA (and LSDBA), JSS will only take into account the LTA percentage provided.

Transitional Tax-Free Amount Certificate

Once issued, this will show an accurate assessment of how much of the LSA (and LSDBA) remains, taking into account information provided to JSS. Individuals should only apply for a Transitional Tax-Free Amount Certificate from a registered pension scheme before taking their first tax-free lump sum after 6 April 2024.

JSS are unable to provide any financial or tax related advice.