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A tax charge may arise if the amount saved in an individual’s various pension schemes exceeds the annual allowance for that year.

If there is such a tax charge the individual must disclose it on their self assessment tax return on the additional information pages (for the year to 5 April 2014 this was Box 10 under other information on page Ai4).

The amount of the annual allowances in recent years is as follows:

2009/10                          £245,000

2010/11                          £255,000

2011/12                            £50,000

2012/13                            £50,000

2013/14                            £50,000

2014/15                            £40,000

Carry-forward of annual allowance

The current year’s annual allowance is deemed to be used first. If this is insufficient to avoid an annual allowance charge, any unused annual allowance from the three previous years can then be used. The earliest year’s unused allowance is used first then the next earliest and so on. The carry forward is automatic so it does not have to be claimed.

Unused annual allowance arises for a year if the amount of the annual allowance exceeds the total pension input amount for that year. Unused annual allowance is only available for carry-forward if it arises during a tax year in which the individual is a member of a registered pension scheme. However, even if the pension input amount for the year is nil, carry forward would be available (if nil then the whole of the annual allowance would be carried forward).

Amount saved towards the individual’s pension benefits 

The amount saved towards the individual’s pension benefits includes the following:

  1. Individuals’ contributions into money purchase pension schemes.
  2. Employers’ contributions into money purchase schemes.
  3. Any third parties contributions into the individual’s money purchase scheme. This would include contributions made by friends and relatives.
  4. Capital value of the increase in the amount of any defined benefits during the year. The benefits at the start of the year are adjusted by a consumer prices index increase, then the adjusted figure is taken away from the amount of the benefits at the end of the year. The increase is multiplied by 16 to give the capital value (for 2010/11 or earlier years a factor of 10 rather than 16 was used). These calculations can be complicated but the pension scheme administrator should be able to provide these.
  5. For cash balance pension schemes the increase in the amount that would have been available for provision of benefits if the individual had become entitled to the benefits at that time (opening rights adjusted in line with the consumer prices index). Again these calculations can be complicated but the pension scheme administrator should be able to provide these.
  6. For hybrid pension schemes the amount is the higher amount of total contributions and any increase in the amount that would be available for provision of benefits. Again the pension scheme administrator should be able to provide these.

Pension input period

To see if an individual’s pension savings is more than the annual allowance they would need to look at the pension savings for PIPs that end in the tax year.

The pension input period (PIP) does have to be the same as the tax year. A PIP normally runs for a year but can be less than a year or longer than a year. An individual who is a member of a number of pension schemes may find that different schemes have different PIPs. Further information on PIPs is available here.

Information provided by the pension provider

The pension scheme provider should issue a statement to the member whose pension input amount exceeds his annual allowance for a tax year. This should be issued automatically without the member requesting it and it should normally be provided no later than 6 October following the tax year. The statement should show the following:

  • the member’s aggregate pension input amounts for the pension input period ending in the tax year
  • their annual allowance for the tax year
  • their aggregate pension input amounts for each of the pension input periods ending in the three tax years immediately preceding the tax year
  • their annual allowance for each of the three preceding tax years.

However, if the member’s pension input amount does not exceed their annual allowance for a tax year then the pension scheme may not issue such a statement automatically and the member may need to request such a statement. The information requested by the member should be provided within three months of the request or, if later, by 6 October following the tax year. If the scheme administrator has not received the necessary information from the sponsoring employer of an occupational scheme, he is given until three months after receipt of that information to satisfy the member’s request.

Tax charge

No tax charge arises on an individual who goes above the annual allowance in a tax year if they:

  • retired and started taking a pension because of serious ill health
  • died.

Subject to the above exemptions, the annual increase in an individual’s rights under all registered pension schemes of which they are a member is measured against their annual allowance, and any excess over the annual allowance (increased by carry forward of unused allowances in previous three years) is chargeable to tax (called the ‘annual allowance charge’). For 2011/12 onwards the excess is charge was as follows:

  1. At the basic rate of tax in relation to so much of the excess, when added to the individual’s taxable income does not exceed the basic rate band
  2. At the higher rate of tax in relation to so much of the excess, when so added exceeds the basic rate limit but does not exceed the higher rate limit
  3. At the additional rate of tax in relation to so much of the excess, when so added exceeds the higher rate limit.

The charge is not dependent upon the residence or domicile status of the individual or the scheme administrator.

So effectively the excess contribution over and above the annual allowance is charged to income tax as though it were part of the individual’s taxable income and as if it formed the top slice of that income, although it is not treated for any tax purposes as income, so for example losses, reliefs and allowances cannot be set against it and it does not count as income for the purposes of any double tax treaty.

The individual themselves is liable to the tax, although for 2011/12 onwards, if an individual’s tax liability on the annual allowance charge for a tax year exceeds £2,000 they may arrange for the tax to be paid from their pension scheme or schemes.

Article contributed by ACCA In Practice