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For members of the Local Government Pension Scheme in England and Wales

The annual allowance

The annual allowance is the amount your pension savings can increase by in a year without you having to pay extra tax. If your savings increase by more than the annual allowance, you will have to pay tax on the excess. The standard annual allowance is currently £40,000.

Your annual allowance 03:22

Tax rules limit how much pension you can build up each year without having to pay a tax charge. This video explains how the annual allowance works.

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Visit the Videos page to watch more of our ‘Pensions made simple’ videos, including Welsh language versions.

Who is affected by the annual allowance?

Most people aren’t affected by the annual allowance because their pension savings don’t increase by more than £40,000 in a year. You are most likely to be affected if one or more of these statements applies to you:

How is the annual allowance worked out?

The increase in the value of your LGPS benefits in a year is calculated by:

The pension input period is the same as the tax year – 6 April to 5 April.

The value of your LGPS benefits is:

If the value of your pension benefits at the end of the year less their value before the start of the year is more than the annual allowance, you may have to pay a tax charge.

The annual allowance applies to all pension schemes, not just the LGPS. If you pay into more than one pension scheme in a year, you will need to find out the total increase in pension savings across all schemes to find out if you have exceeded the annual allowance.

You can use the Annual allowance quick check tool to check if your LGPS pension savings are likely to exceed the annual allowance.

Carry forward

The carry forward rule allows you to carry forward unused annual allowance from the three previous years. This means that you may not have to pay an annual allowance tax charge, even if the value of your pension savings increases by more than the annual allowance in a year. To carry forward unused annual allowance from an earlier year, you must have been a member of a tax-registered pension scheme in that year.

The tapered annual allowance for high earners

The annual allowance is reduced or ‘tapered’ for higher earners. The annual allowance will be reduced if your ‘Threshold income’ and ‘Adjusted income’ exceed the limits in a year. For every £2 that your Adjusted Income exceeds the limit, your annual allowance is reduced by £1. Your annual allowance cannot be reduced below the minimum. These limits changed from April 2020. The table below shows the limits that apply.

TermDefinitionLimit 2016/17 to 2019/20 Limit 2020/21 onwards
Threshold incomeBroadly, your taxable income after your pension contributions have been deducted (including AVCs deducted under the net pay arrangement£110,000£200,000
Adjusted incomeBroadly, your threshold income plus pension savings built up in the tax year£150,000£240,000
Minimum annual allowanceThe minimum annual allowance that can apply£10,000£4,000
Tapered annual allowance limits

Flexible benefit access and the annual allowance

If you have benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed since 6 April 2015, then the money purchase annual allowance rules may apply. This will only be the case if your total contributions to a money purchase arrangement exceed the money purchase annual allowance in a year.

If your contributions exceed the money purchase annual allowance, your pension savings in the LGPS will be measured against the alternative annual allowance.

Tax yearMoney purchase annual allowance (MPAA)Alternative annual allowance if MPAA exceeded
2017/18 onwards£4,000£36,000
The money purchase annual allowance

If you access flexible benefits, your pension scheme must give you a flexible access statement. You should give your LGPS pension fund a copy of this statement.

Exceeding the annual allowance

Your pension fund must tell you if your pensions savings in the LGPS exceed the annual allowance in a tax year. They must inform you within six months of the end of the tax year – by 6 October. Your pension fund is not required to tell you if you have exceeded the tapered annual allowance.

If you exceed the annual allowance in a year, you must report this to HMRC in your self-assessment tax return.

If you have an annual allowance tax charge that is more than £2,000, you may be able to opt for the LGPS to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension. This is known as ‘scheme pays’. If you are retiring, you must elect for scheme pays before you take your pension. Contact your pension fund to find out more about scheme pays and the time limits that apply.

If you wish to slow down your pension build-up, you may wish to consider joining the 50/50 section. In the 50/50 section you pay half your normal contributions and build up pension at half the normal rate. You retain full life cover and ill health cover. You can find out more about 50/50 in the Paying less section.

Before taking any action to reduce your tax liabilities you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser.

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