TAX ALLOWANCE
Annual Allowance
The Annual Allowance (AA) is a limit on the total benefits that can be built up in a defined benefit pension scheme and the contributions that can be paid to a defined contribution pension scheme per tax year. From 6 April 2023 the standard AA increased from £40,000 to £60,000. Any pension savings above the AA are subject to additional tax charges.
The money purchase annual allowance
This is relevant if you have flexibly accessed benefits from a Defined Contribution (DC) pension but continue to work and save into a different pension. If so, the maximum amount you can contribute to DC arrangements before having to pay tax is currently set at £10,000 (2023/2024 tax year). If you save over this amount, you will pay tax on any excess.
The tapered Annual Allowance
For members who have a total taxable income of more than £260,000, the AA will reduce by £1 for every additional £2 of taxable income above £260,000. The maximum reduction will be £50,000, so anyone with an income of £360,000 or more will have an AA of £10,000.
This particular tax limit is complex, so you might want to seek financial advice if you are affected.
Scheme pays
If you are subject to an AA tax charge, you can either pay this yourself directly to HMRC using the self-assessment system or in certain circumstances, you can ask your pension scheme to pay the charge on your behalf. This is known as ‘Scheme pays’ and if you use this facility your NGE Group pension or money purchase AVCs will be reduced accordingly.
Scheme pays can generally only be used when there is an AA tax charge payable from the NGE Group of at least £2,000. If you choose to use Scheme pays, your decision cannot be revoked or withdrawn at a later date, although it may be amended if the amount of your AA tax charge changes.
You can find out more information from HMRC (you will be directed to an external site).
Where can I get more information?
If you think that you may be affected by the AA, please contact Railpen for more information.
If you have been issued a Pension Savings Statement this year, the slides to Railpen’s webinars on the AA, which were held during November 2023, are available to view here. An updated FAQ v2 featuring answers to the questions collated from both webinar sessions is available here.
Changes to the Lifetime Allowance
The Lifetime Allowance tax charge in respect of savings in excess of the Lifetime Allowance was removed from April 2023 (with individuals taxed at their marginal tax rates instead) and ended on 5 April 2024.
From 6 April 2024, the Lifetime Allowance was replaced by two new allowances which generally work as follows:
- The Lump Sum Allowance (LSA)
A cumulative maximum limit of £268,275 (i.e. 25% of the 2023/2024 Lifetime Allowance) on the amount of tax-free lump sum payable on retirement.
- The Lump Sum and Death Benefits Allowance (LSDBA)
A cumulative limit of £1,073,100 (i.e. the 2023/2024 LTA) on the tax-free elements of lump sums that can be paid in life and death, to or in respect of an individual.
The new allowances are overall allowances that apply across all of your registered pension arrangements. If any cash lump sums that you take or that are paid on your death exceed either of the new allowances, the recipient will be taxed at their marginal rate of Income Tax.
If you think these changes will affect you or if you’ve applied for and hold any valid HMRC tax free lump sum protections, you should take financial advice from an FCA regulated adviser. You can find one in your local area by visiting the following website: https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/lifetime-allowance-for-pension-savings – please bear in mind you will need to pay for any regulated advice.