Employment Tax

Annual allowance

Produced by Tolley in association with John Hayward
  • 19 Oct 2021 23:17

The following Employment Tax guidance note Produced by Tolley in association with John Hayward provides comprehensive and up to date tax information covering:

  • Annual allowance
  • NHS Pension Scheme
  • Exemption from the annual allowance rules
  • Carry forward of unused annual allowance
  • The annual allowance and those who remain in capped drawdown
  • What does the taxpayer need to do?
  • Payment of the annual allowance charge from the member’s pension scheme (‘scheme pays’)

Annual allowance

The annual allowance in relation to registered pension schemes is the maximum amount:

  1. by which a member’s benefits can increase in a pension input period (PIP) (in respect of defined benefit schemes)

  2. that can be contributed to pension arrangements in a PIP (for defined contribution or money purchase schemes)

See Example 1.

If the annual allowance is exceeded, there is a tax charge (the annual allowance charge) on the member. See Example 2.

The annual allowance covers all contributions whether made by the member or any other person, eg the member’s employer.

Following the Finance Act 2004 reforms, the annual allowance reached £255,000 in 2010/11. The annual allowance for 2011/12 to 2013/14 was £50,000. The annual allowance reduced to £40,000 from 2014/15, and has since remained at that level. Pension scheme administrators are required to provide a standard pension savings statement to a member if that member’s pension input amount exceeds the general untapered annual allowance of £40,000 (see below).

From 2020/21 onwards, pensions tax relief will be restricted for those with ‘adjusted income’ (ie taxable earnings including any member and employer pension contributions but excluding charitable contributions) of over £240,000. From 2016/17 until 5 April 2020, it was restricted for those with ‘adjusted income’ of above £150,000.

From 6 April 2020, for every £2 of adjusted income over £240,000 an individual earns, that individual’s annual allowance is reduced by £1. The maximum reduction to the annual allowance is £36,000, so that anyone with adjusted income of £312,000 or above has an annual allowance of just £4,000.

From 6 April 2016 until 5 April 2020, for every £2 of adjusted income over £150,000 an individual earns, that individual’s annual allowance was reduced by £1. The maximum reduction to the annual allowance was £30,000, so that anyone with adjusted income of £210,000 or above had an annual allowance of just £10,000.

To ensure this measure is focused on those higher and additional rate tax payers who are considered to have been

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