Tax allowances

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 is set by the Treasury and is currently £1,073,100.

The LTA takes into account pension benefits like your EAPF pension, additional voluntary contribution funds, personal and group personal pensions, stakeholder pensions, retirement annuity contracts, rights preserved in other occupational schemes, pensions already in payment and pension credits following divorce settlements.

Every time you draw benefits from a pension arrangement after 5 April 2006, 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).

If the total value of your pension rights exceed the LTA, you'll be subject to a tax charge – in addition to the normal application of income tax.

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 annual allowance 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 2016/17 increased by £60,000 and exceeded the standard annual allowance limit of £40,000 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

Year	Increase in benefit	Tax relief	Unused relief	Carry forward
2015/16 (9 July - 5 April)	£40,000	£40,000	£0	£0
2015/16 (1 April - 8 July)	£5,000	£80,000	£0	£0
2014/15	£30,000	£40,000	£10,000	£10,000
2013/14	£45,000	£50,000	£5,000	£5,000

 

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.

So in this example, the member is a 40% taxpayer and will pay tax as follows:

£5,000 x 40% = £2,000 tax due.

The tapered annual allowance was introduced from 6 April 2016 and it affects those individuals with an adjusted income over £150,000 and a threshold income that’s over £110,000.

For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1.  This reduction continues to be applied until the adjusted income reaches £210,000.  Any individual with an adjusted income of £210,000 or more will have a £10,000 annual allowance.

As at present, any unused annual allowance from the three 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

Pension Input Periods (PIPs)

The LGPS pension input period currently runs from 6 April to 5 April each year.

The 2015/16 tax year had 2 pension input periods (running from 1 April 2015 to 8 July 2015 and 9 July 2015 to 5 April 2016) and, prior to this, the pension input period for each year ran from 1 April to 31 March.

If you exceed the annual allowance, you can ask the Fund to pay some or all of your annual allowance tax charge.

In some cases, the Fund 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 Fund paying your annual allowance tax charge, there will 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 Fund 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, our helpful ‘Scheme Pays flowchart’ will tell you exactly what to do.

If your annual allowance 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 Fund wouldn’t be obliged to pay the charge on your behalf
  

For more information on scheme pays (including the qualifying criteria for a ‘mandatory’ scheme pays and the relevant timescales that apply), please see our ‘Scheme Pays Q&A’ factsheet.