Tax limits

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

From 6 April 2023 the AA is £60,000, although a lower limit of £10,000 may apply if you have cashed out a DC pension under the pension freedoms introduced in April 2016. You should have been advised by the Scheme paying the pension lump sum to you if this reduced AA (referred to as the Money Purchase Annual Allowance - MPAA) applies to you going forward. You can read more about the MPAA below and in the DC section of the website by clicking here.

In addition, your AA may also be reduced if you have Adjusted Income of over £260,000 (referred to as the tapered AA), but the complicated rules mean those earning less may also be affected. Please see the drop down below for further information on the tapered Annual Allowance.

The AA applies across all of the schemes you belong to. It’s not a ‘per scheme’ limit and includes all pensions savings that you, your employer, and anyone else make on your behalf. If you exceed the AA in a tax year you will be liable for an AA tax charge on the value of the excess. In addition, if you have paid any DC or Additional Voluntary Contribution (AVC) type contributions you won't receive tax relief on those deemed to have exceeded the limit.

However, you may be able to bring forward any unused allowance from the previous three tax years, to help reduce the AA charge.

HMRC have produced a calculator which you can use to calculate your personal annual allowance and see if you have a tax charge to pay. This can be found on their website at www.tax.service.gov.uk/pension-annual-allowance-calculator. 

We will provide you with a Pension Savings Statement if the value of your benefits built up in the ABF Scheme have exceeded the AA over the tax year. We will also send a Pensions Savings Statement to anyone that is subject to the MPAA. Where a tax charge is payable, the statement provides the options available to you to pay this charge.

From 6 April 2023, if your Adjusted Income exceeds £260,000, then your Annual Allowance will be gradually reduced from £60,000 to £10,000 (previously £40,000 to £4,000), with £1 of allowance lost for every £2 of Adjusted Income over £260,000 (in a similar fashion to the reduction of the personal allowance on earnings over £100,000).

Adjusted Income takes into account all taxable earnings but adds in the value of pension savings made during the year.

To calculate Adjusted Income, take your total taxable income (i.e. all income such as salary, bonus, P11D benefits, interest on deposits, dividends, rental income etc.) less any items allowable for tax relief (such as pension contributions, charity donations etc.), and add to this the total value of pension savings in that year i.e. the increase in total value of any DB benefits plus any DC type contributions (including AVCs).

Here are a few simple examples:

Diana has a total taxable income of £350,000. Diana’s total DC contributions in the tax year were £35,000. She pays no AVCs and does not contribute to any pension schemes outside of ABF.  Therefore, Diana’s Adjusted Income is £385,000 i.e. £350,000 + £35,000. Diana’s tapered AA is £10,000 i.e. £60,000 - (£385,000 - £260,000) / 2 subject to a minimum of £10,000.

Eileen has a total taxable income of £235,000. Eileen’s total DC contributions in the tax year were £27,500. She pays no AVCs and does not contribute to any pension schemes outside of ABF.  Therefore, Eileen’s Adjusted Income is £262,500 i.e. £235,000 + £27,500. Although Eileen’s taxable income is less than £260,000, her Adjusted Income is in excess of £260,000. So, Eileen has a tapered AA of £58,750 i.e. £60,000 - (£262,500 - £260,000) / 2.

As you can see, this definition of Adjusted Income means those with taxable income below £260,000 may be affected if the value of their pension savings takes the total to more than £260,000.

However, only those with ‘Threshold Income’ (another HMRC term that describes taxable income ignoring the increase in value of pension benefits) above £200,000 will be affected. Anyone with ‘Threshold Income’ below £200,000 will be unaffected and will retain their AA of £60,000.

Changes to the AA / tapered AA

The table below summarises the changes to the AA and Tapered AA since the Tapered AA was introduced in 2016:

	Tax years 2016/17 – 2019/20	Tax years 2020/21 – 2022/23	Tax years 2023/24 onwards
Standard AA	£40,000	£40,000	£60,000
Minimum tapered AA	£10,000	£4,000	£10,000
“Threshold Income limit”	£110,000	£200,000	£200,000
“Adjusted Income limit”	£150,000	£240,000	£260,000
Adjusted Income “upper bound” where minimum AA applies	£210,000 or more	£312,000 or more	£360,000 or more

We will provide you with a Pension Savings Statement if the value of your benefits built up in the ABF Scheme have exceeded the AA over the tax year. Where a tax charge is payable, your statement provides the options available to you to pay this charge. If you are subject to the tapered Annual Allowance you will need to assess your pensions savings against this allowance in order to work out whether you have an AA tax charge. 

If you have flexibly accessed a Defined Contribution (DC) pension on or after 6 April 2015 you do not get the standard £60,000 Annual Allowance (AA) and instead are subject to the Money Purchase Annual Allowance (MPAA) which is £10,000 from 6 April 2023.

The MPAA only applies to contributions to DC pensions and not defined benefit (DB) pension schemes.

However, Additional Voluntary Contributions (AVCs) are classed as DC benefits. As a member of the DB section, if you choose to flexibly access these benefits separately to your DB pension this would trigger the MPAA.

You can read more about when the MPAA is triggered in the DC section of the website by clicking here.

The Lifetime Allowance (LTA) was removed from legislation from 6 April 2024 and replaced by three new allowances: the lump sum allowance; the lump sum and death benefits allowance; and the overseas transfer allowance. You can find more about each of these in the drop down below.

The Government announced the abolition of the LTA in the Spring Budget 2023 and this has now been removed from legislation. However, it is possible a future Government may decide to reinstate the legislation.

Background to the LTA
Up until 6 April 2023, the LTA was the maximum amount you could take in pension benefits during your lifetime from all pension schemes before a tax charge was incurred. If the LTA was exceeded, you were subject to the LTA tax charge. It was unlikely for the majority of members that the LTA would be exceeded, therefore no charge applied.

Pension benefits over the LTA that are taken from 6 April 2023 will not have a tax charge applied. Instead, any benefits that are over the LTA will simply be subject to income tax in the normal way.

The LTA was initially set at £1.5m in 2006 and was steadily changed. From April 2018 it increased in line with the rate of inflation, as measured by the Consumer Price Index (CPI). The government previously announced that for tax years 2021-2022 to 2025-2026, the LTA would be frozen.

Retirement Date	Lifetime Allowance
6 April 2014 to 5 April 2016	£1.25 million
6 April 2016 to 5 April 2018	£1 million
6 April 2018 to 5 April 2019	£1.03 million
6 April 2019 to 5 April 2020	£1.055 million
6 April 2020 to 5 April 2023	£1.0731 million
From 6 April 2023	No tax charge on pension benefits over the LTA

Up until 6 April 2023, individuals whose pension savings had reached the LTA were able to apply to HMRC to protect their pension savings from incurring a tax charge when the LTA was reduced. If you hold either Enhanced or one of the Fixed Protections, your ability to build up further pension savings was restricted. HMRC has confirmed that provided you applied for your protection before 15 March 2023, any protection already in place will continue to remain valid. From 6 April 2023 you will be able to build up new pension benefits without losing your protection. If you had a right to a higher tax free lump sum this will continue to apply. If you hold Primary Protection or one of the Individual Protections, you are already able to make ongoing pension savings without affecting your protection, and this will continue alongside any rights to a higher tax-free cash lump sum.

Three new allowances replaced the Lifetime Allowance (LTA) with effect from 6 April 2024: the lump sum allowance; the lump sum and death benefits allowance; and the overseas transfer allowance.

• Lump sum allowance
  The allowance is £268,275 and applies to the tax-free part of lump sums you take from your pension.
  
  
• Lump sum and death benefits allowance
  The allowance is £1,073,100 and applies to the same payments as the lump sum allowance plus serious ill health lump sums and some non-taxable lump sum death benefits.
  
  
• Overseas transfer allowance
  The allowance is £1,073,100 and applies to any pensions you transfer overseas to a Qualified Recognised Overseas Pension Scheme (QROPS).

Your allowances could be different if you have LTA protection in place. 

Any lump sums that exceed your available lump sum allowance or the lump sum and death benefit allowance will be taxed at your marginal rate of income tax. Transfers to QROPS that exceed the overseas transfer allowance will be subject to the Overseas Transfer Charge.

Each time you take a tax-free lump sum you will use up part of your lump sum allowance and lump sum and death benefit allowance. Where pension benefits were put into payment before 6 April 2024 it will be assumed that 25% of this benefit was paid out as a tax-free lump sum and the remaining allowances will be calculated on this basis. However, if you took a smaller percentage of tax-free cash from previous benefits then the remaining allowances will be lower than they should be. You can apply for a transitional tax-free amount certificate which confirms the amount of tax-free cash taken previously and will mean the calculation of the remaining allowances will be correct.

You can only apply for a transitional tax-free amount certificate before your first benefits are taken after 6 April 2024. This event is called the relevant benefit crystallisation event (RBCE). You can request a certificate from any pension scheme where you are currently a member. Schemes have three months from the date of the request to provide a certificate.