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The annual allowance is the maximum amount of pension saving you can have each year that benefits from tax relief. This includes pension savings that you make plus any made for you by someone else - for example, your employer. There is no limit on the amount you can save in a pension scheme, but there is a limit on the amount that can get tax relief each year. If your pension saving is more than the annual allowance you will pay a tax charge on the amount over the annual allowance. This tax charge is called the annual allowance charge.
The amount of the annual allowance for 2010-11 was £255,000. For 2011-12 the amount of the annual allowance is £50,000.
The reduced annual allowance rules apply to everyone for every year they make pension savings. However the annual allowance rules may only affect your tax bill in years that your pension saving is more than £50,000. Even if your pension saving is more than £50,000 in a year, you still may not have an annual allowance tax charge if you have not used all your annual allowance in the last three tax years - see the section below on what happens if your pension saving is more than the annual allowance for the year.
So although the annual allowance rules apply to everyone, most people will not be affected by the reduced annual allowance.
If your pension savings for a tax year are less than the £50,000 annual allowance, then the charge will not apply to you for that tax year. Even though pension savings may be more than £50,000 for the current tax year, the charge may be reduced or not apply at all if your pension savings were less than that for earlier years. If this applies, you can carry forward unused allowances from those years to reduce the amount of tax due for the current year.
Find out more about how the carry forward rules work.
There are certain situations when some or all of your pension savings are not tested against the annual allowance, even though your total pension savings might be more than £50,000:
the annual allowance does not apply to those pension savings for the tax year the benefits or lump sum are paid, so there will be no annual allowance charge in respect of those savings.
The final situation in which the annual allowance charge may not apply is if you are no longer building up benefits under the arrangement. This is known as being a deferred member. If your deferred benefits do not go up by more than the amount:
the annual allowance charge will not apply to them.
Read more on when the annual allowance charge will not apply
The annual allowance rules apply to everyone. But you will only have to pay the charge if:
You are responsible for finding out if you are due to pay the annual allowance tax charge. To help you with this you can ask the administrator of each pension scheme of which you are a member to tell you how much pension saving you have made for the tax year in that scheme.
You are normally responsible for paying any annual allowance charge that is due.
However, you might be able to ask the administrator of your pension scheme to pay the annual allowance charge that is due.
If you are liable for a tax charge you will need to complete a Self Assessment tax return to show the amount by which your total pension savings exceed your annual allowance. You will need to complete a Self Assessment tax return even if you have asked your pension scheme to pay the tax charge due.
The return, additional pages and help sheets will guide you through the process of working out the pension savings from your pension schemes. The tax charge will be worked out for you and is payable as part of your normal Self Assessment tax bill, unless you have asked your pension scheme to pay the tax charge due.
Find out more about how to report and pay your annual allowance charge.
Find out more about how to ask your pension scheme to pay your annual allowance charge (PDF 95K)
The first step is to work out the pension savings for each scheme of which you are a member. This is the increase in value over a 12 month period called the 'pension input period'.
Read more about pension input periods
How you measure the increase in value over the period for a particular scheme depends on what type of scheme is involved. The most common types are money purchase (which includes personal pensions and some schemes provided by employers) and defined benefits (often referred to as final salary) schemes (another type of scheme commonly offered by employers).
Find out about pension arrangements and which type of pension arrangement you may have
For personal pensions, the increase in value is simply the amount you have contributed in the period, grossed up to cover the basic rate tax added by HM Revenue & Customs (HMRC), for example if you pay £800 a month into a personal pension, this is grossed up to £1,000 a month and your pension savings for that scheme will be £12,000.
For workplace pension schemes, the value of contributions made by your employer is also included in your pension savings. Where the scheme is a money purchase (also known as defined contribution) scheme, the increase in value for the period is the amount you have contributed out of your pay together with amounts contributed on your behalf by your employer. So if your salary is £50,000 a year and you contribute 4 per cent and your employer adds a further 5 per cent, your pension savings for that scheme will be £2,000 + £2,500 = £4,500.
For defined benefits schemes, the increase is based on how much the value of the pension you expect at the end of the period has gone up compared with what it was at the start. A general 'rule of thumb' for defined benefits schemes is that large pay rises create large pension savings, particularly when combined with long pensionable service. Higher pay and higher 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.
There is also an online calculator that you can use to work out the total amount of your savings (the 'pension input amount') and any unused annual allowance for some but not all types of pension savings. You can also use it to work out if you have any unused annual allowance that you can carry forward from up to three years before the 2011-12 tax year. Follow the first link below.
Pension savings annual allowance calculator
Read more about how to calculate your pension input amount
The administrator of your pension scheme can tell you the value of your pension savings - the pension input amount - for the Pension Input Period (PIP) for the tax year. You can ask them to give you a statement of this amount for the current or any of the previous three tax years. You should only need this if you think your total pension savings for the tax year will be more than £50,000. This statement is called a 'pension savings statement'.
If you ask your pension scheme administrator for a pension savings statement, it is proposed that they should give you this by the later of:
If you have pension savings in more than one pension scheme you will need to contact the pension scheme administrator of each of your pension schemes separately.
For 2011-12 only, schemes will be allowed more time to produce these statements. If your scheme administrator is not able to give you one by 6 October 2012 or within three months of your request for one, you can estimate the value of your pension savings until your administrator can give you a statement.
More about how to estimate the amount of your pension savings
The pension scheme administrator will tell you if your pension savings in that pension scheme is more than the annual allowance. From April 2013 they will automatically give you a pension savings statement telling you the pension input amount is for the tax year and the previous three tax years. This statement must be given to you by 6 October following the end of the tax year.
If your total pension savings are more than the annual allowance for the tax year you might still not have to pay the annual allowance charge. You can carry forward any annual allowance that you have not used from the previous three tax years to the current tax year. You add the amount of the unused annual allowance to this year's annual allowance. This gives you a total amount of available annual allowance.
If your pension saving is more than your available annual allowance you will have to pay the annual allowance charge - but only on the amount over your available annual allowance.
Bob has total pension savings of £85,000 for the tax year. This is more than the £50,000 annual allowance for the year.
However, in the three previous tax years his pension saving was £30,000 below the annual allowance for each tax year. 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.
Find out more about the three year carry forward rule
There are special rules for calculating the amount available for carry forward to tax years 2011-12, 2012–2013 and 2013-14.
Read more about carry forward from years before 2011-12
First, check that you have no unused annual allowance available from previous years to increase the allowance available for the current tax year.
Find out more about the three year carry forward rule
The annual allowance tax charge is due on any pension savings over and above the annual allowance available for the year.
The effect of the annual allowance tax charge is to remove tax relief on any pension savings over the available annual allowance. The amount you pay depends on the rate at which tax relief has effectively been given on the excess pension savings, which in turn depends on how much taxable income you have and the amount of your excess pension savings.
To find out the amount of your annual allowance charge you add the amount of your excess pension savings to the amount of income you actually pay tax on. The amount of pension saving:
If you are filing your tax return online the computer will work out the amount of the tax charge for you.
John has £10,000 excess pension saving on which he has to pay the annual allowance charge. John also has £142,000 income that he has to pay tax on. 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.
£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.
Find out the full details of how to work out the rate of the annual allowance charge
In certain circumstances you can ask your pension scheme to pay your annual allowance tax charge. If you are able to do this you will still have to work out the amount of charge due first as you have to tell your scheme how much tax it has to pay for you.
Find out more about how to ask your pension scheme to pay your annual allowance charge (PDF 95K)
You are responsible for telling HMRC that you are liable to the annual allowance charge. This should be done using the Self Assessment tax return. If you do not normally complete tax returns you should tell HMRC that you need to complete a tax return.
The tax charge is payable as part of your completion of the tax return, unless you have asked your pension scheme to pay the tax charge due.
Read more about telling HMRC about your liability to the annual allowance charge
Find out more about how to ask your pension scheme to pay your annual allowance charge (PDF 95K)
No, it does not matter how much pension savings you have previously had each year. There is no protection.
From 6 April 2011 individuals who have enhanced protection will no longer have protection from any annual allowance charge.
No, you cannot avoid the annual allowance charge simply by undoing the contribution. The reduced annual allowance applies to any pension saving in PIPs ending on or after 6 April 2011.
You may have a PIP that has already started in before 14 October 2010 but ends in 2011-12. So at the start of the PIP you expected the annual allowance to be £255,000. The reduced annual allowance will apply to these PIPs but there will be special transitional rules to cover this situation.
Find out more about pension input periods
Read more about the transitional provisions for the reduced annual allowance in 2011-12
The annual allowance charge will not apply to any pension savings of more than £50,000 built up before 14 October 2010 where the amount of these savings was less than the previous annual allowance of £255,000.
The normal rules on when a contribution is paid apply.
What are the normal rules for when a contribution is paid?
There will be no further changes to the special annual allowance rules introduced in Finance Act 2009. These rules have now been repealed and will no longer apply to pension savings made after 5 April 2011.
