Annual allowance is the amount by which the value of your pension benefits may increase in any one year (years run from 6 April to 5 April) without you having to pay a tax charge.
For the tax year 2022 to 2023, the annual allowance is £40,000. The assessment covers any pension benefits you may have in all tax-registered pension arrangements – not just this scheme. For the tax year 2021 to 2022, the annual allowance was £40,000. If your pension benefits in the Kent Pension Fund exceed this amount, we write to you by the October following the end of the tax year.
The annual allowance also applies in the year you take your benefits, although there is an exemption in the case of serious ill health retirement or death.
Exceeding the Annual Allowance
If you exceed the total annual allowance with your Kent pension, we will write to you. If you think you will exceed the annual allowance combining all or some of your pension schemes (not just Kent) you should contact us to request the increase in the value of your pension benefits with Kent. Pension schemes are only required to notify you if you exceed the total annual allowance in their scheme therefore you may not receive notification but may still exceed the annual allowance when some or all of your schemes are combined.
If you exceed the annual allowance in any year you are responsible for reporting this to HMRC on your self-assessment tax return. We will be able to tell you how much the value of your scheme benefits have increased during an input period, plus an amount of any Additional Voluntary Contributions (AVCs) you may have paid during the input period.
Annual allowance tax charge
You would only be subject to an annual allowance tax charge if the value of your pension savings in a tax year increases by more than the annual allowance. However, there is a carry forward rule that allows you to carry forward unused annual allowance from the last 3 tax years. This means you can look back at the last 3 tax years to see if you have any unused allowance from these years and if so, you may be able to carry forward the unused allowance and add it to your annual allowance in the current tax year.
For example, if you exceeded the annual allowance by £10,000 in 2020/21 but had unused annual allowance from the last 3 tax years of £15,000, there would be no annual allowance tax charge to pay in this case. It is your responsibility to check whether you have any unused allowance from the last 3 tax years to carry forward.
Most people will not be affected by the annual allowance tax charge because the value of their pension saving will not increase in a tax year by more than the annual allowance or, if it does, they are likely to have unused allowance from previous tax years that can be carried forward.
If you are affected you will be liable to a tax charge (at your marginal income tax rate) on the amount by which the value of your pension savings in the tax year, less any unused allowance from the previous 3 years, exceeds the annual allowance.
If you have an annual allowance tax charge that is more than £2,000 and your pension savings in the scheme alone have increased in the tax year by more than the annual allowance you may be able to opt for the scheme to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits. If you need further information about this option and how it may affect your pension benefits please complete the Annual allowance scheme pays enquiry form.
If you want the scheme to pay some or all of an annual allowance charge you must notify us of this no later than 31 July in the year following the end of the tax year to which the annual allowance charge relates. However, if you are retiring and become entitled to all of your benefits from the scheme and you want the scheme to pay some or all of the tax charge on your behalf from your benefits, you must tell us before you become entitled to those benefits.
Tapered annual allowance for high earners and changes from April 2021
From April 2016 to April 2020 the AA was tapered for members who had a ‘Threshold Income’ in excess of £110,000, and ‘Adjusted Income’ in excess of £150,000.
‘Threshold Income’ is broadly your taxable income after the deduction of your pension contributions. ‘Adjusted Income’ is broadly your threshold income plus pension savings built up over the tax year. This means that you could exceed the £150,000 threshold even if your salary was below this level.
The taper reduced the AA by £1 for £2 of adjusted income received over £150,000 until a minimum AA of £10,000 was reached.
From 6 April 2020 the ‘Threshold Income’ was increased to £200,000, the ‘Adjusted Income’ to £240,000 and the minimum tapered AA to £4,000. This means less scheme members will be impacted by the tapered AA although the standard AA of £40,000 will still apply.
It is for individuals to calculate whether the taper impacts on them and contact us for their Pension Input Amount as this will not automatically be provided.
If you have calculated that you have a tapered annual allowance and want the scheme to pay some or all of an annual allowance charge, you must notify us no later than 15 December immediately following the end of the tax year to which the annual allowance charge relates.
Read the work out your reduced (tapered) annual allowance guidance on the government website to find out more about the tapered allowance.
For further information and how to calculate and check your annual allowance visit GOV.UK.