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Tax allowances

Your LGPS pension is taxable, but your lump sum is paid tax free. Whether you pay tax when you retire depends on the amount of your pension and your personal circumstances.

When you retire, you should receive a copy of your P45. Your employer has to forward the P45 directly to Capita (our scheme administrators) where the appropriate tax code will be applied against your pension.

Capita will then notify HM Revenue & Customs that you're in receipt of your pension and a new tax code will be issued. If your tax code is not known immediately, a temporary code will be used until we've received the correct information.

If you wish to make an enquiry about your tax code please contact your local tax office.

For more information about tax controls on pension savings, please see our factsheet.

You can also use our High Earners AA Resource Hub. This hub provides the documents and reference materials you’ll need to help you understand your responsibilities.

Last updated: 24/09/2018

As you benefit from tax relief on your pension contributions, HM Revenues & Customs (HMRC) applies two tests to your pension benefits called the Annual Allowance test and Lifetime Allowance test. Click below for more info:

The annual allowance test

The annual allowance is the amount by which the value of your pension benefits may increase in any one year without you having to pay an excess tax charge. This amount is set by the Treasury and is currently £40,000.

If you exceed this limit in any year, you may be liable to pay a tax charge. If a tax charge is due, you can pay the tax charge yourself, or you can ask the Fund to pay the tax for you in return for a reduction in your pension benefits.  You're responsible for notifying HMRC if you exceed the annual allowance on your Self-Assessment tax return.

If the increase in your pension benefits is less than the annual allowance limit in any given year, you can carry forward the unused amount of allowance to the following 3 tax years. This is to prevent a tax charge arising from any sudden increase in value of pension benefits, so, for example, as a result of a pay increase.

Further information on the annual allowance charge can be found by accessing the HMRC website by clicking here or by accessing our 'Tax controls and pension savings' factsheet.
The lifetime allowance test

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 £1.03 million.

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.
Calculating the annual allowance tax charge

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.

 
Tapered annual allowance

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.

Annual allowance and Scheme pays

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. 
What should I do next about lifetime allowance?

You can get more information on how the LTA works, and on a range of protections provided by HMRC by clicking here or by reading our 'Tax controls' factsheet.

Capita can provide further factual information about your pension benefits within the Scheme, but this is an extremely complex area and they won't be able to give you advice about whether or not protection is right for you.

Your decision will be dependent on your personal circumstances and we recommend that you speak to an independent financial adviser.

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