PTM056110 - Annual allowance: tax charge: rate of tax charge: general
Overview
Individuals other than Scottish taxpayers
Scottish taxpayers
Overview
Sections 227(4), (4A), (4AA) & (4AB) and 228C(3) Finance Act 2004
The effect of the annual allowance charge is to reduce tax relief on any pension saving over the annual allowance.
The annual allowance charge is not at a fixed rate but will depend on how much taxable income the individual has and the amount of their pension saving in excess of the annual allowance.
To find out how much they will pay, the individual will need to work out the rate or rates of tax that would be charged if their excess pension savings were added to their taxable income.
The rate, or rates, of tax that would be so charged can differ between Scottish taxpayers and other individuals. PTM056120 explains what is meant by a Scottish taxpayer.
The amount of the tax charge will be worked out automatically if the individual is filing their Self Assessment tax return online.
Note – tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes, the pre and post-alignment tax years. Despite this split there is still a single annual allowance charge for tax year 2015-16 as a whole (see PTM058010).
Individuals other than Scottish taxpayers
For individuals who are not Scottish taxpayers, the annual allowance charge can comprise up to three rates.
The amount of the annual allowance charge can be in whole or in part at 45 per cent, 40 per cent or 20 per cent, depending on the individual’s taxable income and the amount of their pension savings that are in excess of the annual allowance.
For 2011-12 and 2012-13 only, the amount of the annual allowance charge can be in whole or in part at 50 per cent, 40 per cent or 20 per cent depending on the individual’s taxable income and the amount of their pension savings that are in excess of the annual allowance for the year concerned.
To work out which rate applies and to how much, take the following steps.
Note - the following steps are based on tax rates of 45 per cent, 40 per cent and 20 per cent. For 2011-12 and 2012-13 the same steps apply except that all references to 45 per cent should be replaced with 50 per cent.
Note – from tax year 2019-20 onwards the annual allowance charge applies in the same way for an individual who is a Welsh taxpayer, except that the appropriate tax rates are replaced with the equivalent Welsh rates. In practice, this means the Welsh basic rate replaces basic rate, Welsh higher rate replaces higher rate and Welsh additional rate replaces additional rate.
Step 1: How to work out the annual allowance tax charge
Establish the taxable income, after personal allowances, for the year (called ‘reduced net income’ in tax legislation). This is the amount on which the individual will actually pay tax for the year. PTM056120 explains what is meant by reduced net income
Step 2: How to work out the annual allowance tax charge
Work out how much of the total pension input amount for the tax year is liable to the charge. This is the total pension input amount for the tax year, less the annual allowance for that year, less any unused annual allowance carried forward from earlier years. (See PTM055100.)
Step 3: How to work out the annual allowance tax charge
Add together the reduced net income (from Step 1) and the excess pension savings (from Step 2). The amount of pension saving (from Step 2):
- over the higher rate limit will be taxed at 45 per cent
- over the basic rate limit but below the higher rate limit will be taxed at 40 per cent
- below the basic rate limit will be taxed at 20 per cent.
PTM056120 explains what is meant by basic rate limit and higher rate limit.
Step 4: How to work out the annual allowance tax charge
Where the total after Step 3 exceeds the higher rate limit (generally £150,000 but may be more if the individual’s pension contributions are paid using relief at source or Gift Aid donations are made, see PTM056120) that part (which could be all) of the excess pension savings from Step 2 over the higher rate limit is chargeable at 45 per cent.
Step 5: How to work out the annual allowance tax charge
From the amount of excess pension savings (at Step 2) deduct the amount brought into charge at 45 per cent in Step 4.
Step 6: How to work out the annual allowance tax charge
Work out the difference between the higher and basic rate limits.
Step 7: How to work out the annual allowance tax charge
If the amount after Step 5 is less than the amount after Step 6, the amount at Step 5 is chargeable at 40 per cent. Otherwise the amount chargeable at 40 per cent is the difference between the higher and basic rate limits from Step 6.
Step 8: How to work out the annual allowance tax charge
Any remaining amount of excess pension savings not brought into charge in Step 4 or Step 7 is then chargeable at 20 per cent.
Example
Frances’s total pension input amount for the tax year has exceeded her available annual allowance for the tax year (i.e. the annual allowance for the current tax year plus any unused annual allowance from the previous three tax years that can be carried forward to the current tax year). There is an excess amount of £30,000 on which she has to pay the annual allowance charge. Frances also has £140,000 income that she has to pay tax on (her ‘reduced net income’) for the same tax year. Frances’s excess pension saving and reduced net income added together is £170,000.
For the purpose of this example Frances’s higher rate limit is £150,000 and her basic rate limit is £40,000.
Step 1: Frances has £140,000 income that she has to pay tax on (her ‘reduced net income’).
Step 2: Frances has £30,000 pension saving on which she has to pay the annual allowance charge.
Step3: Frances’s excess pension saving and reduced net income added together is £170,000.
Step 4: The total after Step 3 exceeds £150,000 by £20,000 so £20,000 of her excess pension savings is chargeable at 45 per cent.
Step 5: The amount of Frances’s excess pension savings not chargeable at Step 4 is £30,000 - £20,000 = £10,000.
Step 6: The difference between Frances’s higher and basic rate limits is £150,000 - £40,000 = £110,000.
Step 7: The amount after Step 5 (£10,000) is less than the amount after Step 6 (£110,000) so £10,000 is chargeable at 40 per cent.
Step 8: There is no remaining amount of excess pension savings not brought into charge by Step 4 or Step 7.
Frances’s tax charge is calculated as:
£20,000 @ 45 per cent = £9,000
£10,000 @ 40 per cent = £4,000
£0 @ 20 per cent = £0
Frances’s annual allowance tax charge is £13,000.
Scottish taxpayers
The annual allowance charge applies in the same way for individuals who are Scottish taxpayers as it does for other individuals, except that the rates and the points at which they apply can differ for a Scottish taxpayer and this can mean the charge comprising up to four rates.
For 2016-17 and 2017-18 tax years, in practice, this means ‘Steps 1 – 8’ in Individuals other than Scottish taxpayers apply equally for Scottish taxpayers; the only exception being that, for the 2017-18 tax year, the references to ‘basic rate limit’ in ‘Step 3’ are replaced with ‘Scottish basic rate limit’.
For the 2018-19 tax year onwards, take the following steps.
Step 1: How to work out the annual allowance tax charge
Same as ‘Step 1’ in Individuals other than Scottish taxpayers
Step 2: How to work out the annual allowance tax charge
Same as ‘Step 2’ in Individuals other than Scottish taxpayers
Step 3: How to work out the annual allowance tax charge
Add together the reduced net income (from Step 1) and the excess pension savings (from Step 2). The amount of pension saving (from Step 2):
- over the Scottish higher rate limit will be taxed at 46 per cent
- over the Scottish intermediate rate limit but below the higher rate limit will be taxed at 41 per cent
- over the Scottish basic rate limit but below the intermediate rate limit will be taxed at 21 per cent
- below the Scottish basic rate limit will be taxed at 20 per cent.
PTM056120 explains what is meant by basic rate limit and higher rate limit.
Step 4: How to work out the annual allowance tax charge
Where the total after Step 3 exceeds the Scottish higher rate limit (generally £150,000 but may be more if the individual’s pension contributions are paid using relief at source or Gift Aid donations are made, see PTM056120) that part (which could be all) of the excess pension savings from Step 2 over the higher rate limit is chargeable at 46 per cent.
Step 5: How to work out the annual allowance tax charge
From the amount of excess pension savings (at Step 2) deduct the amount brought into charge at 46 per cent in Step 4.
Step 6: How to work out the annual allowance tax charge
Work out the difference between the Scottish higher and intermediate rate limits.
Step 7: How to work out the annual allowance tax charge
If the amount after Step 5 is less than the amount after Step 6, the amount at Step 5 is chargeable at 41 per cent. Otherwise the amount chargeable at 41 per cent is the difference between the Scottish higher and intermediate rate limits from Step 6.
Step 8: How to work out the annual allowance tax charge
From the amount of excess pension savings (at Step 2) deduct both the amount brought into charge at 46 per cent in Step 4 and the amount brought into charge at 41 per cent.
Step 9: How to work out the annual allowance tax charge
Work out the difference between the Scottish intermediate and basic rate limits.
Step 10: How to work out the annual allowance tax charge
If the amount after Step 8 is less than the amount after Step 9, the amount at Step 8 is chargeable at 21 per cent. Otherwise the amount chargeable at 21 per cent is the difference between the Scottish intermediate and basic rate limits from Step 9.
Step 11: How to work out the annual allowance tax charge
Any remaining amount of excess pension savings not brought into charge in Step 4, Step 7 or Step 10 is then chargeable at 20 per cent.
Note - the lowest possible rate at which the annual allowance charge applies for a Scottish taxpayer is the Scottish basic rate; the Scottish starter rate does not apply.