Tax allowance

The maximum value of pension benefits that can build up during your lifetime without incurring a tax charge is known as the lifetime allowance (LTA). The limit set by the Treasury was previously set to remain at £1,073,100 until 5 April 2026, but, in March 2023, the government confirmed that it was to be, effectively, abolished from 6 April 2023.

Removal of the LTA now means that any pension benefits paid in excess of the LTA will now be taxed at your marginal rate, rather than having to pay a fixed tax charge of 25% or 55% on the excess benefits.

In addition, the maximum tax free lump sum that you can now receive is £268,275 (though whether you can actually take a tax free lump sum of £268,275 depends on the value of your pension benefits and whether you’ve already drawn any other pension benefits).

Every time you draw benefits from a pension arrangement between 6 April 2006 and 5 April 2024, you should be told by the pension provider the percentage of the LTA used.

When you become entitled to receive a pension benefit, you'll have to advise your pension provider of the amount of LTA already used (if known), as this may restrict the maximum tax free lump sum that you can take from the EAPF.

Capita will write to you if you've exceeded the LTA, but it's important to remember that Capita will only have details of your current EAPF pension, so you'll need to let them know of any other pension benefits you've built up elsewhere.

Capita will write to you if your EAPF benefits exceed the AA in a tax year and will let you know if you've any unused allowance from previous years that can be used to offset the tax charge.

Example:

A member’s pension benefits for 2023/24 increased by £80,000 and exceeded the standard AA limit of £60,000 for that year by £20,000.

The member can now carry forward tax relief from the previous 3 years starting with the oldest first:

Tax Relief Carry Forward Table (for reference, the AA was £40,000 for the 2020/21, 2021/22 and 2022/23 tax years)

The member can now use the £15,000 unused relief to offset the £20,000, leaving an excess amount of £5,000. 

To calculate the tax charge, the member will need to apply tax at their marginal rate to the excess.

In this example, the member completes a self assessment tax return, and it’s determined that they need to pay a tax charge of  40% on their excess pension savings; this would be calculated as follows: £5,000 x 40% = £2,000 tax due.

The tapered annual allowance was introduced from 6 April 2016 and, since 6 April 2023, it affects those individuals with an adjusted income over £260,000 and a threshold income that’s over £200,000.

For every £2 of adjusted income over £260,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.

As at present, any unused annual allowance from the 3 previous tax years will be available to be carried forward and added to an individual’s annual allowance.

• Adjusted income is broadly your total income from all sources plus your pension input amount
• Threshold income is broadly equal to your total income from all sources, after the deduction of tax and pension contributions

For more details about Tapered annual allowance, download our ‘Tax controls and pension savings’ factsheet from our Publications page.

Pension Input Periods (PIPs)

The Local Government Pension Scheme (LGPS) pension input period currently runs from 6 April to 5 April each year.

If you exceed the annual allowance (AA), you can ask the EAPF to pay some or all of your AA tax charge.

In some cases, the EAPF is obliged to pay the charge on your behalf (mandatory scheme pays) and, in other cases, it’s entirely at their discretion (voluntary scheme pays). In return for the EAPF paying your AA tax charge, there'll be an appropriate reduction to your pension benefits within the Scheme.

We'll send you confirmation that your election has been received and recorded. Where the EAPF is not obliged to pay the charge on your behalf, but has the discretion to so, they’ll consider your application and get back to you a short time later to let you know if they’ve approved your application or not.

If you’re interested in the Scheme Pays option, download our ‘Scheme Pays flowchart’ which tells you exactly what to do.

If your AA charge changes after you send us the Election form, you can't revoke that election, but in some circumstances, you can amend it by sending in a further form to Capita.

Please note that timescales for ‘mandatory’ and ‘voluntary’ scheme pays are different and, in some circumstances, you may have a tax charge that falls into both categories. Failure to comply with the timescales could result in:

• HMRC fines; and
• A ‘mandatory’ scheme pays election turning into a ‘voluntary’ one, so the EAPF wouldn’t be obliged to pay the charge on your behalf

For more details on scheme pays (including the qualifying criteria for a ‘mandatory’ scheme pays and the relevant timescales that apply) you can read our helpful factsheet called 'Scheme Pays Questions and Answers'. Download our Scheme Pays Q&A factsheet.