Annual allowance charge

By Tolley  in association with John Hayward
  • (Updated for Budget 2020)
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The following Employment Tax guidance note by Tolley  in association with John Hayward provides comprehensive and up to date tax information covering:

  • Annual allowance charge
  • Introduction
  • The annual allowance charge ― to 5 April 2011
  • The annual allowance charge ― from 6 April 2011
  • Paying the annual allowance charge

Introduction

There is no limit on the amount that can be invested in a registered pension scheme by a member or their employer, but there is a limit on the amount that is eligible for tax relief each year which is dealt with through the process associated with the annual allowance.

A pension input beyond the annual allowance will result in a tax charge known as the annual allowance charge. The purpose of the annual allowance tax charge is to remove tax relief on any pension input that has been made which exceeds the member’s available annual allowance.

The definition of the annual allowance charge is to be found in FA 2004, s 227, as follows

“(1) A charge to income tax, to be known as the annual allowance charge, arises where―

a)the total pension input amount for a tax year in the case of an individual who is a member of one or more registered pension schemes, exceeds

b)the amount of the annual allowance for the tax year.”

The annual allowance charge ― to 5 April 2011

Until 5 April 2011 there was a fixed rate set for the annual allowance charge in FA 2004, s 227(4):

“(4) The annual allowance charge is a charge at the rate of 40% in respect of the amount by which the total pension input amount exceeds the amount of the annual allowance.”

Thus, if the total inputs to registered pension schemes exceeded the annual allowance for a particular tax year in the period to 5 April 2011, an annual allowance charge was applied at the rate of 40% based upon the excess pension input amount. This remained in place until 5 April 2011.

The annual allowance charge ― from 6 April 2011

The purpose of the annual allowance tax charge is to remove tax relief on any pension

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