PTM051100 - Annual allowance: essential principles
Glossary PTM000001
The annual allowance has applied from the tax year 2006-07 onwards. This guidance explains the annual allowance rules from 6 April 2011 including the money purchase annual allowance and tapered annual allowance rules.
For guidance on:
- the annual allowance rules before 6 April 2011 see the Registered Pension Schemes Manual (RPSM) on the National Archives website.
- the special annual allowance rules that applied to certain individuals for tax years 2009-10 and 2010-11, see RPSM15100000 on the National Archives website.
What the annual allowance is
Who the annual allowance rules apply to
Amount of annual allowance
How the annual allowance is tested
How to work out the value of pension savings (pension input amounts) for a tax year
Pension savings that do not count towards the annual allowance
The money purchase annual allowance
The tapered annual allowance
Working out if the annual allowance charge is payable for a tax year
The amount of annual allowance charge
Who is responsible for paying the annual allowance charge
What the annual allowance is
The annual allowance is the maximum amount of pension savings an individual can make each year with the benefit of tax relief.
This includes pension savings that individuals make plus any made by someone else on behalf of the individual - for example, their employer.
There is no limit on the amount of pension savings an individual can make each year but there is a limit in respect of the tax relief for those pension savings.
The annual allowance is not a restriction on the amount of tax relief given out when pension savings are made. Instead the annual allowance works by applying a tax charge when the annual allowance is exceeded. The tax charge recoups, in a broad way, the amount of tax relief given to the part of the annual increase in pension savings that is over the annual allowance.
This is particularly important in the context of an individual claiming relief on pension contributions. If the amount being claimed in one tax year is seemingly over the annual allowance for that year the amount of relief given out is not restricted to the annual allowance. Provided all the necessary conditions are met, relief is given on either £3,600 or (more likely in this case) the total of the individual’s relevant UK earnings, whichever is the greater. PTM040000 has more information about tax relief given to pension contributions.
Pension savings are tested against the annual allowance differently depending on the type of arrangement. For other money purchase arrangements and hybrid arrangements that might provide other money purchase benefits, it is the actual amount of contributions paid that are tested. For other types of arrangements (e.g. defined benefits) it is the increase in the value of benefit rights that is tested not the amount of contributions.
If a member’s pension saving is more than the annual allowance they will pay a tax charge on the amount over the annual allowance. This tax charge is called the annual allowance charge.
Who the annual allowance rules apply to
The annual allowance rules apply to members of registered pension schemes (from 6 April 2011, including members with enhanced protection). They also apply to members of overseas pension schemes where either they or their employer qualify for UK tax relief:
- under a double taxation agreement
- under section 307 Income Tax (Earnings and Pensions) Act 2003
- due to migrant member relief (see PTM111200), or
- due to transitional corresponding relief (see PTM111500).
Pension saving under a UK pension scheme that is not a registered pension scheme does not count towards the annual allowance. So savings under a UK employer-financed retirement benefits scheme do not count towards the annual allowance.
Savings under a non UK scheme will not count towards the annual allowance if neither the individual nor their employer qualified for UK tax relief under the provisions shown above.
Amount of annual allowance
Sections 228, 228ZA, 227ZA and 227B Finance Act 2004
The following table shows the changes in the level of the annual allowance since 2011-12. Details of the annual allowance for earlier years are available on the National Archives.
| Tax Year | Annual Allowance |
|---|---|
2014-15 onwards |
£40,000* |
2011-12 to 2013-14 |
£50,000 |
* For tax year 2015-16 only, a transitional £80,000 annual allowance applies.
From tax year 2015-16 a money purchase annual allowance was introduced for individuals who have flexibly accessed certain money purchase arrangements – see The money purchase annual allowance part below for more information
From tax year 2016-17 a reduced tapered annual allowance applies to certain high-income individuals (see The tapered annual allowance part below for more information).
This means that from 6 April 2015 the amount of the annual allowance depends on the individual’s circumstances.
Tax year 2015-16 only
For tax year 2015-16 the amount of an individual’s annual allowance depends on:
- how the transitional £80,000 annual allowance applies to the individual, see PTM058000 for more information, and
- whether or not the money purchase annual allowance applies to the individual because they have flexibly accessed a money purchase arrangement – see The money purchase annual allowance part below for more information.
Tax year 2016-17 to 2022-23
From tax year 2016-17 the amount of the individual’s annual allowance depends on the tax year and whether:
- the money purchase annual allowance applies to the individual - see The money purchase annual allowance part below for more information,
- the tapered annual allowance applies to the individual - see The tapered annual allowance part below for more information.
For individuals who have not flexibly accessed a money purchase arrangement and to whom the tapered annual allowance does not apply, the annual allowance is £40,000.
Tax year 2023-24 onwards
From tax year 2023-24 the amount of the individual’s annual allowance depends on the tax year and whether:
- the money purchase annual allowance applies to the individual
- the tapered annual allowance applies to the individual
For individuals who have not flexibly accessed a money purchase arrangement and to whom the tapered annual allowance does not apply, the annual allowance is £60,000.
How the annual allowance is tested
To work out if an individual has to pay an annual allowance charge they need to find the total amount of their pension saving counting for a tax year.
Pension savings are called 'pension input amounts' by the legislation. The amount of pension savings under all the arrangements for schemes of which an individual is a member counting for a tax year is called the 'total pension input amount'.
Sections 238, 238ZA, 238ZB and paragraph 9 Schedule 34 Finance Act 2004
The value of an individual’s pension input amount is measured over a period of time called a pension input period.
Before 2016-17 a pension input period under a registered pension scheme did not have to match the tax year. The pension inputs in a pension input period ending in the tax year are measured against the annual allowance for the tax year. For example, if the pension input period for an arrangement ran from 1 July 2013 to 30 June 2014 pension savings (pension inputs) under that arrangement would be measured against the annual allowance for the 2014-15 tax year.
From 6 April 2016 pension input periods for existing arrangements will match the tax year so that they run from 6 April to the following 5 April.
Where the first pension input period for a new arrangement starts on or after 9 July 2015 that pension input period will end on the following 5 April.
Where the first pension input period for an arrangement started before 9 July 2015, special rules apply for the 2015-16 tax year to ensure that all pension input periods will match the tax year from 2016-17 onwards. PTM058000 has details about the transitional pension input period rules for 2015-16.
PTM052100 gives full information about pension input periods.
For non-UK pension schemes the pension input period must match the UK tax year so that it runs from 6 April to the following 5 April. This has always been the case since the annual allowance was introduced in tax year 2006-07.
How to work out the value of pension savings (pension input amounts) for a tax year
Sections 227C to 227F and 229 to 237 Finance Act 2004
The total amount of an individual’s pension savings for a tax year (the ‘total pension input amount') is the total of all the ‘pension input amounts’ the individual has under each arrangement under all:
- registered pension schemes and
- currently-relieved non-UK pension schemes (see PTM113310)
of which they are a member.
The first step is to work out the pension savings (pension input amount) for each arrangement that an individual is a member of for pension input periods ending in the tax year. This is the increase in value of the pension saving over the pension input period.
How the increase in the value of pension savings is measured depends on the type of arrangement.
Other money purchase (defined contribution) arrangements
The pension input amount for an individual under an other money purchase arrangement is, broadly, the total gross contributions paid in the pension input period by:
- the individual
- their employer, and
- any other person on behalf of the individual.
PTM053200 gives full information on how to work out the pension input amount for an other money purchase arrangement.
Where the arrangement is under a currently relieved non-UK scheme see also PTM113330.
Defined benefits arrangements
For defined benefits arrangements the pension input amount is based on how much the value of the individual’s accrued pension and, in certain cases, lump sum has gone up over the pension input period. A general ‘rule of thumb’ for defined benefits arrangements is that large pay increases can create large pension input amounts, particularly when combined with long pensionable service. High pensionable pay and high accrual rates also result in higher pension savings. So all other conditions being equal, someone who builds up benefits at a rate of 1/50th per year of service will have a larger pension input than someone with a 1/60th accrual rate.
PTM053300 gives more information on how to work out the pension input amount for a defined benefits arrangement.
Where the arrangement is under a currently relieved non-UK scheme see also PTM113320.
Cash balance arrangements
For cash balance arrangements the pension input amount is based on the increase in the individual’s promised pension pot over the pension input period.
PTM053400 gives more information on how to work out the pension input amount for a cash balance arrangement. Where the arrangement is under a currently relieved non-UK scheme see also PTM113320.
Hybrid arrangements
For a hybrid arrangement the possible types of benefit and their pension input amounts have to be identified. If, for example, the arrangement offered possible money purchase or defined benefits the pension savings amount is worked out as if it were a money purchase benefit and also as a defined benefit. The pension input amount for a hybrid arrangement is the greatest of the possible pension input amounts.
PTM053500 gives more information on how to work out the pension input amount for a hybrid arrangement. Where the arrangement is under a currently relieved non-UK scheme see also PTM113340.
PTM051700 gives information about how an individual can find out what their pension input amounts are.
When the money purchase annual allowance applies
The section The money purchase annual allowance part below explains what the money purchase allowance is and when it applies. When the money purchase annual allowance applies to an individual, their pension inputs also need to be split into two categories:
- Money purchase pension inputs made after flexibly accessing benefits
- Other inputs.
PTM056500 onwards gives information about certain adjustments that might need to be made to the pension input amounts described above when the money purchase annual allowance applies.
Pension savings that do not count towards the annual allowance
Section 229(3) and (4) Finance Act 2004
Any pension savings made in a pension input period in which the individual:
- dies, or
- becomes entitled to those pension savings due to severe ill-health
do not count towards the annual allowance.
For tax years before 2016-17, pension input periods did not have to align with the tax year. Individuals could therefore make pension savings in a pension input period that began in the tax year in which they died or became entitled to benefits due to severe ill-health but that pension input period ended in the following tax year. Any such pension savings do not count towards the annual allowance.
PTM051200 has more information and explains the conditions that need to be met for the severe ill-health exemption.
The money purchase annual allowance
Sections 227ZA and 227B to 227G Finance Act 2004
From 6 April 2015 the money purchase annual allowance rules may apply to an individual who has flexibly accessed benefit under a money purchase arrangement. PTM056520 explains which events are classed as flexibly accessing benefits and so trigger the money purchase annual allowance rules to apply to an individual.
In any tax year the money purchase annual allowance will apply to an individual if:
- they have flexibly accessed benefits, and
- their ‘money purchase inputs’ are more than the money purchase annual allowance.
For 2015-16 to 2016-17 the money purchase annual allowance is £10,000.
For 2017-18 to 2022-23 the money purchase annual allowance is £4,000.
For 2023-24 onwards the money purchase annual allowance is £10,000.
Only the money purchase annual allowance applies
Where the money purchase annual allowance applies for the tax year and the individual is not affected by The tapered annual allowance part below, the individual will have:
1. The standard annual allowance of £40,000 against which all their pension inputs are tested
Or
2. An alternative annual allowance plus a money purchase allowance, where:
- the individual’s ‘other inputs’ (essentially defined benefit inputs) are tested against the ‘alternative annual allowance’, and
- the individual’s ‘money purchase pension inputs’ are tested against the money purchase annual allowance.
The amount subject to the annual allowance charge (the chargeable amount) is whichever is the greater of the amount found by using:
- The standard annual allowance, or the
- Alternative annual allowance plus the money purchase annual allowance.
PTM053100 and PTM056510 have details about ‘money-purchase inputs’ and ‘other inputs’.
The alternative annual allowance is calculated as:
The standard annual allowance – the money purchase annual allowance
So, for example, in 2016-17 the alternative annual allowance for someone not affected by the tapered annual allowance is £30,000 (£40,000 - £10,000).
In 2017-18 to 2022-23the alternative annual allowance for someone not affected by the tapered annual allowance will be £36,000 (£40,000 - £4,000).
In 2023-24 the alternative annual allowance for someone not affected by the tapered annual allowance will be £50,000 (£60,000 - £10,000).
Both money purchase and tapered annual allowance apply
Where both the money purchase annual allowance and The tapered annual allowance part below apply to the individual for the tax year, the individual will have:
1. Their tapered annual allowance against which all their pension inputs are tested
Or
2. A reduced alternative annual allowance plus a money purchase allowance
- the individual’s ‘other inputs’ (essentially defined benefit inputs) are tested against the reduced alternative annual allowance, and
- the individual’s ‘money purchase pension inputs’ are tested against the money purchase annual allowance.
The amount subject to the annual allowance charge (the chargeable amount) is whichever is the greater of the amount found by using:
- The individual’s tapered annual allowance, or
- The reduced alternative annual allowance plus the money purchase annual allowance.
For a year in which The tapered annual allowance part below applies to an individual, their alternative annual allowance is reduced to reflect their lower tapered annual allowance, as follows:
Their tapered annual allowance – the money purchase annual allowance.
So, for example, in 2017-18 to 2022-23 an individual with a tapered annual allowance of £32,000 would have a reduced alternative annual allowance of £28,000 (£32,000 - £4,000).
In 2023-24 an individual with a tapered annual allowance of £32,000 would have a reduced alternative annual allowance of £22,000 (32,000 - £10,000).
The tapered annual allowance
Section 228ZA Finance Act 2004
From 6 April 2016 certain individuals will have their annual allowance reduced. This reduced annual allowance is called the tapered annual allowance. The tapered annual allowance applies to an individual in a tax year, if
- Their ‘threshold income’ is more than £200,000 (£200,000 for 2020-21 to 2023-24, and £110,000 for 2016-17 to 2019-20) AND
- their ‘adjusted income’ is more than £260,000 (£240,000 for 2020-21 to 2022-23, and £150,000 for 2016-17 to 2019-20).
An individual’s annual allowance will be reduced by £1 for every £2 their adjusted income is above £260,000 (£240,000 for 2020-21 to 2022-23, and £150,000 for 2016-17 to 2019-20). However the annual allowance cannot be reduced to be less than £10,000 (£4,000 for 2020-21 to 2022-23, and £10,000 for 2016-17 to 2019-20).
PTM057100 provides detailed guidance on who the tapered annual allowance applies to, and how to calculate ‘threshold income’ and ‘adjusted income’.
Working out if the annual allowance charge is payable for a tax year
Sections 227 - 228A Finance Act 2004
Note: For tax years 2011-12 to 2014-15 special rules applied if an individual had entered into either flexible drawdown (see PTM062580) or dependants’ flexible drawdown (see PTM072330). See RPSM06105070 on the National Archives website. The following guidance does not apply to these individuals.
There are three broad steps to finding out if any annual allowance charge is due.
1. Work out the individual’s total pension input amount for the tax year.
Guidance on how to calculate an individual’s pension input amount starts at PTM053000.
For tax years 2015-16 onwards individuals who have flexibly accessed benefits under a money purchase arrangement (see PTM056520) will also need to know the value of their ‘money purchase inputs’ and 'other inputs’. This is so the individual can work out if The money purchase annual allowance part below applies to them for the tax year.
2. Is the total pension amount more than the individual’s annual allowance?
No annual allowance charge is due if the individual’s total pension amount is less than their annual allowance for the tax year.
If the individual’s total pension amount is more than their annual allowance for the tax year, go to step 3.
For tax years 2011-12 to 2014-15, the individual’s annual allowance was the standard annual allowance.
For 2015-16 the individual may have had the standard annual allowance of £40,000 or the money purchase annual allowance part below may apply to them.
For 2023-24 the individual may have the standard annual allowance of £60,000 or the money purchase annual allowance part below may apply to them.
From 2016-2017 the following may apply to an individual:
- The standard annual allowance
- The tapered annual allowance (as seen in the part below)
- The money purchase annual allowance (as seen in the part below)
- Both the tapered annual allowance and the money purchase annual allowance.
If the money purchase annual allowance only applies to the individual, they must compare which produces the greater amount subject to the annual allowance charge:
- The ‘alternative annual allowance’ measured against ‘other inputs’ plus the money purchase annual allowance for ‘money purchase inputs’, or
- The standard annual allowance measured against total pension inputs.
Whichever produces the greatest amount subject to the annual allowance charge is the individual’s annual allowance.
If both the tapered annual allowance and the money purchase annual allowance applies to the individual, they must compare which produces the greater amount subject to the annual allowance charge:
- The reduced ‘alternative annual allowance’ measured against ‘other inputs’ plus the money purchase annual allowance for ‘money purchase inputs’, or
- Their tapered annual allowance measured against total pension inputs.
Whichever produces the greatest amount subject to the annual allowance charge is the individual’s annual allowance.
The section The money purchase annual allowance part above outlines when the money purchase annual allowance applies, the amount of the money purchase annual allowance and how to calculate the alternative annual allowance and the reduced alternative annual allowance.
3. Use carry forward to reduce the amount subject to the charge
Even if the individual’s total pension input amount is more than the annual allowance (on the tapered basis or not) an annual allowance charge may still not be due.
An individual can carry forward any annual allowance they have not used in recent previous tax years to the current tax year.
When considering the tax charge due for tax years 2011-12 to 2014-15 individuals can carry forward unused annual allowance from the previous three tax years. There are special rules for calculating the amount available to carry forward to tax years 2011-12 to 2013-14 – see PTM055300 on the National Archives website.
For 2015-16 to 2018-19 special rules applied (see PTM055100).
For 2019-20 onwards individuals can carry forward unused annual allowance from the previous three tax years.
The amount available to carry forward from any tax year depends on whether or not
- the tapered annual allowance, and/or
- the money purchase annual allowance
applied to the individual for the relevant tax year.
PTM055000 onwards provides detailed guidance on the use of carry forward of unused annual allowance.
The individual adds the amount of the unused annual allowance to their annual allowance for the tax year (so if the tapered annual allowance applies the unused annual allowance is added to the individual’s tapered annual allowance).
Where the money purchase annual allowance applies to the individual for the tax year the amount of the unused annual allowance is added to their alternative annual allowance (or their reduced alternative annual allowance if the tapered annual allowance also applies). Carry forward of unused annual allowance cannot be used to reduce the tax charge in relation to money purchase pension inputs when the money purchase annual allowance applies.
The amount of the annual allowance plus the carried forward annual allowance is often referred to as the individual’s available annual allowance.
If the individual’s total pension input amount is more than their available annual allowance they will have to pay the annual allowance charge - but only on the amount over their available annual allowance.
Example – money purchase annual allowance doesn’t apply
Bob has total pension savings of £85,000 for the tax year 2011-12. This is more than the £50,000 annual allowance for that tax year.
However, in each of the three previous tax years his pension saving was £30,000 below the annual allowance for the tax year (note for the purpose of carry forward the annual allowance is treated as £50,000 for each of the tax years 2010-11, 2009-10 and 2008-09). This means Bob has £90,000 unused annual allowance to carry forward.
Together with the £50,000 annual allowance for the tax year Bob can have pension savings of £140,000 without an annual allowance charge arising.
As Bob’s £85,000 pension saving is less than his available annual allowance there is no annual allowance charge for that tax year.
Example – money purchase annual allowance applies
Bob flexibly accessed a money purchase arrangement in tax year 2016-17 and has total pension savings of £85,000 for the tax year. This includes a ‘money-purchase input’ of £15,000 all of which occurred after flexibly accessing and an ‘other input’ of £70,000.
Bob has £90,000 unused annual allowance to carry forward. The tapered annual allowance does not apply to Bob for the tax year.
Together with the £30,000 alternative annual allowance for the tax year Bob can have ‘other input’ amounts of £120,000 without an annual allowance charge arising on those ‘other inputs’.
As Bob’s £70,000 ‘other inputs’ are less than his available annual allowance there is no annual allowance charge in respect of them for the tax year.
However, Bob does have an annual allowance charge in respect of his ‘money-purchase input’ for the tax year. The chargeable amount is £5,000 (£15,000 less the money purchase annual allowance, the amount being £10,000 in this case).
Note - in this case, the money purchase annual allowance applies because it results in a greater amount being chargeable to the annual allowance charge than if the annual allowance of £40,000 was applied.
If the annual allowance was applied to Bob’s £85,000 total pension savings for the tax year together with the £90,000 unused annual allowance, there would be no amount chargeable.
The amount of annual allowance charge
The annual allowance tax charge is due on any pension savings (pension input amounts) over and above the individual’s available annual allowance for the tax year or, if it applies, over and above the money purchase annual allowance.
The effect of the annual allowance tax charge is to restrict tax relief on any pension savings over the available annual allowance or, if it applies, money purchase annual allowance.
The annual allowance charge cannot be avoided simply by ‘undoing’ a contribution. In fact not only will the individual still have made a pension input, the payment back to the individual will also probably be an unauthorised member payment.
There is an exception where relievable pension contributions are paid by, or on behalf of, the individual during a pension input period for an other money purchase arrangement but which are subsequently returned to the individual by way of a refund of excess contributions lump sum that is made in a pension input period ending in the tax year 2014-15 or a later tax year (see PTM053200 for more details).
To find out the amount of the annual allowance charge the individual needs to add the amount of the excess pension savings to the amount of their taxable income. The amount of pension saving:
- over the individual’s higher rate limit will be taxed at the relevant additional rate for the tax year
- over the individual’s basic rate limit but below the member’s higher rate limit will be taxed at the relevant higher rate for the tax year
- below the individual’s basic rate limit will be taxed at the relevant basic rate for the tax year.
The relevant rate of tax will depend on whether the member is a Scottish taxpayer, Welsh taxpayer or taxpayer in the rest of the UK.
If the individual is filing their tax return online the individual inputs their calculated excess pension savings amount and the online system will work out the amount of the tax charge for them.
Example
John has £10,000 excess pension saving on which he has to pay the annual allowance charge for tax year 2011-12. John also has £142,000 taxable income for the tax year 2011-12. The total of John’s taxable income and excess pension saving is £152,000.
For the purpose of this example the higher rate limit is £150,000, the basic rate limit is £40,000, the additional rate of tax is 50% and the higher rate of tax is 40%.
£2,000 of John’s excess pension saving is above the £150,000 higher rate limit. £8,000 of his pension saving is above the basic rate limit but below the higher rate limit. John’s tax charge is calculated as
£2,000 @ 50% = £1,000
£8,000 @ 40 % = £3,200
John’s annual allowance charge is £4,200.
PTM056000 gives full details on how to work out the rate of the annual allowance charge.
Who is responsible for paying the annual allowance charge
Section 237A and 237B Finance Act 2004
The individual is responsible for paying the annual allowance charge. The individual remains responsible for paying the annual allowance charge even if they or any of their pension schemes are not UK resident.
The individual may share responsibility for paying the annual allowance charge to HMRC with a scheme administrator by asking the scheme administrator to pay the charge out of the individual’s benefits in the scheme.
The individual can demand this of a scheme administrator of a particular registered pension scheme (‘mandatory basis’) if the following applies:
- the amount of the individual’s annual allowance charge for the tax year is more than £2,000, and
- the amount of the individual’s pension saving (their pension input amount) in that pension scheme for the same tax year is more than the annual allowance for the tax year (for example, for tax year 2016-17, this means more than £40,000 - i.e. the tapered annual allowance is ignored).
The individual must tell the scheme administrator that they want the scheme to pay the tax. Full details on what must be done to exercise the option of the annual allowance charge being paid from an individual’s pension saving in a scheme can be found from PTM056400.
Otherwise, it may be that a scheme is prepared to offer the option on a voluntary basis.
The individual must complete a Self Assessment tax return to show the amount by which their total pension savings exceeds their annual allowance and submit the return to the usual filing deadlines.
The individual must do this even if they are sharing responsibility for paying the annual allowance charge with one or more of their scheme administrators.
The Self Assessment tax return, additional pages and help sheets guide the individual through the process of working out the pension savings from their pension schemes. Based on the input figure for excess savings, the tax charge will be worked out for the individual and is payable as part of their Self Assessment tax bill.
More information on how to report and pay the annual allowance charge can be found at PTM056200.