Tax and pensions

There are two controls managed by HM Revenue and Customs (HMRC) on the amount of pension savings you can make without having to pay extra tax. These are known as the Annual Allowance and Lifetime Allowance. Please note that this is in addition to any income tax you pay on your pension once it is in payment.

Annual Allowance

The Annual Allowance (AA) is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes.

The AA is currently capped at £40,000 although a lower limit of £4,000 may apply if you have already started drawing a pension. The AA applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all of the contributions that you or your employer pay or anyone else who pays on your behalf.

If the value of your pension savings in any one year (including pension savings outside of the LGPS) are in excess of the annual allowance, the excess will be taxed as income.

The Government reduced the AA from £255,000 to £50,000 from 6 April 2011 and then reduced it again to £40,000 from 6 April 2014.

Further changes to the AA have been made for higher earners from 6 April 2016, which resulted in special transitional rules for the 2015/16 tax year.

If you exceed the AA in any year you are responsible for reporting this to HMRC on your self-assessment tax return.

The Scheme will send you a Pension Savings Statement no later than 6 October in the event your benefits accrued within the Hackney Pension Fund exceed your AA limit. However, the Fund will not be able to inform you if you exceed the tapered annual allowance due to the definition of income used by HMRC.

If you have an AA tax charge that is more than £2,000 and your pension savings in the LGPS alone have increased in the year by more than the standard AA 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 benefits.

If you would like to understand the potential impact of making further contributions to the Scheme, please go to the AA calculator on HMRC website. Use this link https://www.tax.service.gov.uk/paac

You can also go to our member factsheet Tax Controls on Pensions for more information.

Lifetime Allowance

There is no limit on the value of pension savings that can be built up by a member. However, there is a limit to how much you can build without incurring an excess tax charge. This limit known as the lifetime allowance (LTA).

The LTA covers any pension benefits you may have in all tax-registered pension arrangements – not just the Scheme.

The LTA was introduced on 6 April 2006 at £1,500,000. It has subsequently regularly changed since it was introduced.

Effective from 6 April 2019 the LTA was £1,055,000. This will change each year based on CPI.

The rate of tax you pay on pension savings above your LTA depends on how the money is paid to you - the rate is:

  • 55% if you get it as a lump sum
  • 25% if you get it any other way, for example pension payments or cash withdrawals

The charge can be applied in either of the two ways or a combination of both depending on how you take the excess benefits above the LTA.

For more information on Lifetime allowance please see our fact sheet Tax Controls on Pensions or please contact us.