Annual Allowance
What is the AA?
This is the maximum tax-free build up of pension savings which the Revenue will allow you to make each year.
How much is the AA?
The AA for annual pension savings was £255,000, but it will reduce to £50,000 for any pension savings made in the 2011/12 tax year onwards. This reduced limit will remain in force at that level until at least 2015/16.
How do I calculate my annual pension savings?
Annual pension savings are counted differently depending on the type of benefits:
- For members of PACE, it means the increase above inflation to your pension benefit over the pension input period multiplied by a factor of 16. (See below for information about the pension input period.)
- For any AVCs paid into PACE it is simply the total contributions made over the pension input period. An example pension savings calculation can be found on page 26.
What is my pension input period?
This is a period set for the purpose of measuring your pension savings against the AA test. Each pension scheme has its own pension input period.
For PACE (and any AVCs paid into PACE) the pension input period runs from 6 April to 5 April.
For example your pension savings over that pension input period ending 5 April 2012 would be compared against the AA for the 2011/12 tax year.
What happens if my annual pension savings exceed the AA?
If your annual pension savings exceed the AA, a tax charge will be payable on the amount of any pension savings in excess of the AA. The tax rate applied to the excess amount will normally be equivalent to your marginal rate of income tax. The intention is that any additional tax payable in respect of the AA is collected via your annual tax return each year.
You may be able to elect to have this tax charge paid out of your pension benefits rather than paid out of your income.
However, if you exceed the AA in any one year, you may be able to offset the potential tax payable by carrying forward any unused allowances (effectively a “tax credit”) from the previous three tax years.
Will the AA affect me?
This will depend on a number of factors specific to your circumstances such as how much you earn or whether you make extra pension savings. Because the AA test is applied to all pension savings, any additional pension savings you make outside PACE will also count towards the test.
The example below demonstrates how pension savings are calculated and measured against the AA.
Unless you make any significant additional pension savings (e.g. AVCs) most members are unlikely to be affected. However, impacted members may be able to reduce or eliminate the tax payable by using any unused allowance from previous years.
The Group Pensions Department can provide general and personal information to help you understand the tax changes but managing your personal tax position is your responsibility. If you believe you may be affected by the new tax rules, please contact Group Pensions Department.
