RPSM06200030 - Member Pages: Annual Allowance: How will the annual allowance be calculated?
Calculating the Annual Allowance
This guidance explains the annual allowance rules up to 5 April 2011. If you want to know how the annual allowance works after that date see the guidance at http://www.hmrc.gov.uk/pensionschemes/annual-allowance/index.htm.
The test for whether an individual has exceeded the annual allowance is made by adding together the value of the inputs to your schemes under all registered pension schemes over a given period ending in the tax year concerned.
These are referred to as the total pension input amounts and the pension input period. In other words, the value of your pension rights at the start of the pension input period is measured against your entitlement at the end. For example a period starting on 1 June 2007 may end on 31 May 2008 and the input in that period will relate to the tax year in which the input period ended which in this example, is the tax year 2008-2009.
The increase in your pension savings will then be tested against the annual allowance for the tax year in which the pension input period ends.
The rules for calculating the pension input amount and what is deemed to be the pension input period will vary depending on the type of arrangement you have within a registered pension scheme so you may want to check with your scheme administrator on how these rules will affect you. You may also want to refer to the technical guidance within this manual - see page RPSM06100050
Example 1
An individual belongs to a registered pension scheme. For the year 2007/08 the employer and the individual both make contributions. The pension arrangement provides money purchase benefits.
| a | b | c | d | e |
| Schemes | Fund | Growth on the fund over 12 month period | Employer Contribution | Employee Contribution |
| 1 | £580,0000 | £34,800 | £75,000 | £20,000 |
The total pension input is £95,000 (columns d & e). The total contribution is within the annual allowance and there will be no annual allowance charge. Investment growth arising within the pension input period (columns c) will not be regarded as pensions input.
Example 2
An individual belongs to two registered pension schemes. For the year 2007/08 employer contributions are made to two schemes and the individual makes personal contributions to all three of the arrangements.
| a | b | c | d | e |
| Type of arrangement | Value of pension at start of pension input period | Value of pension at end of pension input period | Employer Contribution | Employee Contribution |
| Money Purchase | N/A | N/A | £100,000 | £30,000 |
| Defined Benefit | £500,000 | £600,000 | N/A | N/A |
The total pension input is £230,000 (£100,000 input to the defined benefit arrangement and £130,000 to the money purchase arrangement). The total contribution is in excess of the limit of £225,000 so £5,000 will be subject to the annual allowance charge
| Glossary (RPSM20000000) |
