Pension tax changes – overview
The tax relief applicable to pensions has changed a number of times since 2010/11.
HM Revenue & Customs provide guidance for individuals on the HMRC website
You should consider matters carefully before making any decisions and may wish to consult an independent financial adviser for advice.
Nothing in this communication should be interpreted as constituting financial advice. You should obtain independent advice on any specific issues concerning you.
The Pension Scheme Tax Reference (PSTR) for Northern Ireland Civil Service Pensions Schemes
The Pension Scheme Tax Reference (PSTR) is different for each scheme. If you are using Scheme Pays for both schemes, then you will need to inform HMRC of both PSTRs.
- for the Principal Civil Service Pension Scheme (Northern Ireland), it is 00329686RF
- for the alpha pension scheme, it is 00820865RA
Annual Allowance – £60,000 from 6 April 2023
The Annual Allowance sets the maximum amount of pension saving that you can build up in any one year before incurring a tax charge. This includes actual employer and employee contributions to defined contribution schemes (such as an AVC scheme or Partnership), as well as benefits built up in defined benefit schemes such as classic, classic plus, premium, nuvos and alpha.
Prior to the announcement in the Spring Budget 2023, the annual allowance was £40,000 and Pension Savings Statements issued in October 2023 will be issued to all members who breach this limit.
Annual allowance is worked out as 16 times the increase in the value of your pension during the year, plus the increase in value of any automatic lump sum (classic/classic plus only). A measure for inflation is included in the calculation.
Please be aware that this doesn’t just affect high earners. Any of the following actions or processes could also have an impact on the amount of annual allowance you use:
- buying added pension (especially lump sum purchases)
- contributing towards other pensions savings such as AVCs
- getting a promotion that includes a significant pay rise
- leaving on ill health retirement with an enhancement to your service (please see separate fact sheet on this specific issue - Impact of Annual Allowance on ill health retirement)
- transferring in service from another pension scheme under the preferential Club Transfer terms
- aggregating or linking a previous period of employment from the Civil Service
If you have breached the annual allowance due to your Northern Ireland Civil Service (NICS) pension alone (not including any Defined Contribution AVCs you may be making) you will receive a pension savings statement.
Please be aware that if you are making other pension contributions, eg to a personal pension, it is your responsibility to assess whether you have breached the annual allowance limit across all your pension contributions.
You will not receive a pension savings statement unless you have breached the limit in the NICS pension alone or you have requested a statement.
If you do incur an annual allowance tax bill in relation to your NICS pension and it is more than £2,000, then you will have the option of requesting to use the Scheme Pays facility. Scheme Pays is where the pension scheme will pay an amount of tax for you in exchange for a permanent reduction to your pension. Contact Civil Service Pensions if you do wish to use Scheme Pays.
Further Information on Annual Allowance
Aligning pension input periods
As from 6 April 2016, the amount of your annual allowance for a tax year will be restricted if you have income of over £150,000 for that tax year. To ensure the measure works as intended it is necessary to align pension input periods with the tax year.
For NICS Pensions the pension input period had been 1 January to 31 December. You will have two pension input periods for 2015/16 these will be 1 January 2015 – 8 July 2015 and 8 July 2015 – 5 April 2016.
Some individuals may have put in pension savings of more than £40,000 prior to the Budget, on the expectation that these savings would be tested against the annual allowance for tax years 2015 to 2016 and 2016 to 2017 but which will now be only tested against the annual allowance for 2015 to 2016. Transitional rules were introduced to ensure that in these circumstances pre-Budget savings of up to £80,000 are protected from an annual allowance charge.
Tapered annual allowance
From April 2016 the government introduced Tapered Annual Allowance. This is triggered when both the ‘threshold income’ and ‘adjusted income’ exceed their designated limits. These limits were subsequently changed April 2020 and again from April 2023, alongside the increase in Annual Allowance limit. The limits for each period can be seen below:
|
Dates affected |
Annual Allowance |
Threshold Income |
Adjusted Income |
Minimum tapered Annual Allowance |
|---|---|---|---|---|
|
From April 2016 |
£40,000 |
£110,000 |
£150,000 |
£10,000 |
|
From April 2020 |
£40,000 |
£200,000 |
£240,000 |
£4,000 |
|
From April 2023 |
£60,000 |
£200,000 |
£260,000 |
£10,000 |
For every £2 of adjusted income they have over adjusted income, their Annual Allowance is reduced by £1 to the stated minimum.
For the 2022/23 tax year the maximum reduction to the annual allowance is £36,000, so that anyone with adjusted income of or above £312,000 will have an annual allowance of £4,000. But following the Spring Budget 2023, from April 2023 the maximum deductions will be £50,000, so that anyone with an adjusted income over £360,000 will have an annual allowance of £10,000.
As is the case at present, any unused annual allowance from the three previous tax years will be able to be carried forward and added to the individual’s annual allowance. Where this annual allowance is reduced by the taper, the carry forward will be the balance of the tapered amount.
HM Revenue & Customs provide further guidance on tapered annual allowance and the definitions of “adjusted income” and “threshold income” on the HMRC website.
Following the change in 2020 and 2023, it is unlikely that a member will exceed the limits unless they have other factors such as an external taxable income. If you think you may be affected we suggest that you seek the assistance of an Independent Financial Advisor.
Lifetime Allowance – £1,073,100 from 6 April 2020.
From 6 April 2020, the Lifetime Allowance has been set at £1,073,100 and will remain at this level until April 2026.
To calculate the value of your pension for Lifetime Allowance purposes, multiply the annual payment by 20, and add any lump sum which is an automatic entitlement. This will mean potential tax bills for some people retiring with a pension of £53,655 or more (premium, nuvos or alpha) or £46,657 (plus lump sum) for members of classic.
For further information regarding the LTA please go to the HMRC website.
You should consider matters carefully and may wish to consult an independent financial adviser.
April 2024 Changes
From 6 April 2024, the Government will abolish and replace the Lifetime Allowance (LTA) with two new allowances. Background to the measure can be found at www.gov.uk.
The two new allowances are:
|
Description |
Limit |
|
|
Lump Sum Allowance (LSA) |
The total amount of tax-free cash an individual member can receive across all pension schemes at retirement. |
£268,275* |
|
Lump Sum and Death Benefit Allowance (LSDBA) |
The overall limit on the amount of tax-free money paid out during an individual’s lifetime. |
£1,073,100* |
*If you have Lifetime Allowance protection, or you have applied to HM Revenue & Customs for a protected allowance, you may be entitled to a larger amount.
How could this change affect me?
Any lump sum benefits paid before 6 April 2024 count towards these new allowances. If any lump sum you wish to take exceeds your available LSA or LSDBA, we may need to limit the amount of lump sum we can pay you. If this happens, we will contact you to let you know your options.
You will continue to receive certificates that refer to both the Lifetime Allowance and Lump Sum Allowance throughout 2024/25.
You may also receive documents that still refer to the Lifetime Allowance while these changes are brought in.
If you have previously taken benefits from the scheme and need to provide another pension scheme with a ‘Transitional Tax-Free Certificate’, we can supply these on request.
What you will need to do when applying for your pension benefits.
We will send you a Personal Details Form to complete. If you answer ‘Yes’ to any of the HMRC questions, you must provide the supporting information requested so we can work out how much of your allowances you have already used and how much you have remaining. If you have pensions with other providers, you will need to contact them to obtain this information.
Independent Financial Advice
Civil Service Pensions cannot offer financial advice.
However, MoneyHelper have pension specialists where members can get free advice without having to pay an Independent financial Advisor, but if you do need a financial advisor MoneyHelper have a tool to locate Financial Conduct Authority regulated Financial Advisors in any area under their “Find a retirement adviser” link.
Their website is at: https://www.moneyhelper.org.uk/en
Further information regarding pensions and tax
Occupational pension schemes and personal pension arrangements which benefit from tax relief are subject to tax rules. The rules limit the amount of tax relief given to pensions. See the publication called Your pension and tax - How the tax rules may affect you.