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Tax and pensions

Contributions you pay to the LGPS are tax-free up to certain limits. You may have to pay extra tax if your pension savings are more than those limits.


In this section we look at the HM Revenue and Customs (HMRC) rules about pension savings. There are limits on:

  • the amount of pension savings you can make in a year – the annual allowance, and
  • the lump sum you can take when you take your pension before you have to pay extra tax. This is in addition to any income tax you pay on your pension when it is paid to you. Most people will be able to save as much as they wish because their pension savings and maximum lump sum are less than the limits.

There is no limit on the amount of pension contributions you can pay. You will not get tax relief on all your contributions if you pay more than your taxable pay into your pension in a tax year.

There is a limit on the amount of extra pension you can buy in the LGPS by paying additional pension contributions. The most you can currently buy is £8,344 of extra yearly pension.

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 a tax on the excess. The standard annual allowance increased from £40,000 to £60,000 on 6 April 2023

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 £60,000 in a year. You are most likely to be affected if one or more of these statements applies to you:

  • You have final salary membership and you receive a significant pay increase. Membership built up before 1 April 2014 is final salary membership. You could also have final salary membership that you transferred from another public service pension scheme.
  • You combine a previous LGPS pension benefit that was built up in the final salary section of the LGPS and your salary is higher than it was when you left the Scheme.
  • You transfer pension rights that include final salary benefits into the LGPS from another public service pension scheme and your current salary is higher than your salary was when you left the other pension scheme.
  • You pay a high level of additional contributions.
  • You are a high earner.
  • You have accessed flexible benefits since April 2015.

How is the annual allowance worked out?

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

  • working out the value of your benefits before the start of the ‘pension input period’
  • increasing that amount by inflation
  • comparing it with the value of your benefits at the end of the ‘pension input period’
  • adding any Additional Voluntary Contributions (AVCs) that you or your employer has paid during the year.

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

The value of your LGPS benefits is:

  • your annual pension multiplied by 16 plus
  • any lump sum you are automatically entitled to. You will have an automatic lump sum if you joined the LGPS before 1 April 2008.

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 on the Local Government Association website 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.

Exceeding the annual allowance

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. This is known as “scheme pays”. The tax charge would then be recovered from your pension benefits.

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.

If you opt out of the LGPS with a right to a deferred benefit, you will not be able to combine those benefits with your new pension if you re-join the LGPS.

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.

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

Lump sum limits

Two lump sum limits were introduced from 6 April 2024. If the total of all lump sums you take from UK pensions is more than one of these limits, you will have to pay extra tax. Tax on any excess is charged at your marginal rate.

In the LGPS, you can generally take up to 25% of the value of your benefits as a lump sum. Most members will not be affected because the maximum lump sum they can take is much lower than the limits. If you have built up a large pension in the LGPS or a different scheme, the new limits may affect you.

Lump sum allowance

The lump sum allowance is £268,275. It limits the amount of tax-free cash you can take from your pension.

Your pension fund must check your lump sum allowance when you take a lump sum from the LGPS. If you have already taken payment of a lump sum from the LGPS or a different UK pension scheme, this used up some of your lump sum allowance. These lump sums use up your lump sum allowance:

  • pension commencement lump sum
  • uncrystallised funds pension lump sum
  • stand-alone lump sum.

From the LGPS, you can only have a pension commencement lump sum. However, you could receive an uncrystallised funds lump sum or a stand-alone lump sum from a different pension scheme.

Lump sum and death benefit allowance

The lump sum and death benefit allowance is £1,073,100. Your pension fund must check this allowance when you take payment of a lump sum. Your personal representatives will do this check when a death grant is paid. The lump sum and death benefit allowance is used up when any of these lump sums are paid:

  • pension commencement lump sum
  • uncrystallised funds pension lump sum
  • stand-alone lump sum
  • serious ill health lump sum (paid before age 75)
  • lump sum death benefit.

Transitional protection

If you took payment of a pension before 6 April 2024, that pension used up part of your lump sum allowance and lump sum and death benefit allowance. Before the next time you take a lump sum, your pension scheme must work out how much of your allowances you have used. Under HMRC rules, they must assume that you took the maximum lump sum allowed.

For most members, this will have no effect on the lump sum they can take from the LGPS. The limits will generally only affect members who have built up very large pensions.

There is a process for members who took a pension or reached age 75 before 6 April 2024, if they did not take the maximum tax-free lump sum. They can apply for a transitional tax-free amount certificate:

  • the certificate includes the total lump sums that they have taken instead of the assumed amount
  • they must apply for the certificate before they take a pension lump sum after 6 April 2024
  • they can apply to any scheme they are a member of for a certificate. HMRC recommends applying to the scheme that is paying the first pension lump sum after 5 April 2024 or the scheme that is paying the biggest pension that started before 6 April 2024.

If you are thinking about applying for a transitional tax-free amount certificate, you may wish to seek specialist independent financial advice. Some members could be worse off if they apply than they would be without a certificate.

The lifetime allowance

Before 6 April 2024, the lifetime allowance limited the total amount of pension benefits a person could have before they paid extra tax. The Government reduced the lifetime allowance three times since it came into force in 2006. Each time it reduced, those people who had already built up large pensions could apply for protection from the reduction.

The lifetime allowance has now been replaced by the two lump sum limits described above. If you hold one of the lifetime allowance protections, your lump sum allowance and lump sum and death benefit allowance could be higher than the standard limits. You must let your pension fund know about any lifetime allowance protection you hold before you take a lump sum.

Applying for lifetime allowance protection

You can still apply to protect your pension lifetime allowance

by applying to HMRC for Fixed or Individual Protection 2016. The deadline for making an application is 5 April 2025. However, you will need to inform HMRC of the value of your pension savings on 5 April 2016 to apply for Individual Protection 2016. Your pension administrator was only obliged to provide you with this information up to 5 April 2020.

Although the lifetime allowance tax charge no longer applies, holding protection may still allow you take a larger tax-free lump sum.

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