Annual Allowance


Estimate your annual allowance - 1995 Scheme

Estimate your annual allowance - 2008 Scheme

What is the annual allowance?

The annual allowance is the maximum amount of tax-free growth an individual's pension savings can grow by in anyone year. If individuals exceed this limit they will need to pay an tax charge, the annual allowance charge, to HMRC. The annual allowance limit covers all your pension savings, except your State pension, so any other pension savings, e.g. AVCís or a personal pension will need to be added to the value of your NHS pension. >/

When was it changed?

From the 6 April 2011 the annual allowance reduced from £255,000 to £50,000.

Will the annual allowance change again?

Yes. The annual allowance will reduce again from 6 April 2014 to £40,000.

What is included in the Annual Allowance?

All contributions to money purchase schemes, defined contribution schemes, personal pensions and the growth in benefits for defined benefit schemes.

How is the Annual Allowance worked out for my NHS Pension Scheme benefits?

In defined benefit schemes such as the NHS Pension Scheme the annual allowance is not based on the contributions that you pay into the Scheme. It is the growth in benefits from one year to the next taking into account inflation, which is measured using the Consumer Price Index (CPI). The growth in your benefits is measured over a "Pension Input Period" which in the NHS Pension Scheme is 1 April to the following 31 March.

How is the Annual Allowance worked out for my NHS AVC Scheme benefits?

Here it is the amount of contributions you (or someone else on your behalf) have paid into the NHS AVC Scheme. If you have policies with more than one AVC provider this will be the combined contributions paid.

Can I work out what my annual pension growth is in the NHS Pension Scheme myself?

No. It is not the amount of contributions you or your employer have paid into the NHS Pension Scheme but the amount of growth in your pension benefits.

Can I work out what my annual pension growth has been from my NHS AVC Scheme contributions myself?

Yes. This is easier for you to work out as it is the contributions you have paid. All three NHS AVC providers routinely issue an annual benefit statement (ABS) that show the amount of AVC contributions paid.

What is a Pension Input Amount (PIA) in the NHS Pension Scheme?

This is the monetary amount your pension savings have grown by in the pension input period.

    It is calculated by determining the difference between the value of your benefits at the start of the pension input period (the opening value) compared with the value at the end of the pension input period (the closing value).

What is the opening value in the NHS Pension Scheme?

This is the value of your benefits at the beginning of the pension input period converted into a capital value, which is increased by the CPI from the previous September (please see "Annual Allowance Example Calculations" for more information).

What is the closing value in the NHS Pension Scheme?

Is the value of the benefits at the end of the pension input period converted into a capital value - please see "Annual Allowance Example Calculations" for more information.

What is included in the Pension Input Amount?

The growth in your NHS Pension Scheme benefits including any doubled years, added years or additional pension being purchased.

How is the annual allowance calculated? - examples

Calculating the Annual Allowance Officer Class Membership

Calculating the Annual Allowance - General Practitioners

Am I at risk of exceeding the annual allowance?

For most members the annual allowance will not affect them. However, any of the following could impact on the growth of your pension savings:

  • Being a high earner with long pensionable membership;
  • Significant increase in membership (e.g. a change from part-time to full-time, doubled membership for Mental Health Officer's).
  • Purchasing added years and/or additional pension
  • A significant pay rise, possibly due to a promotion.
  • Application of late retirement factors (in the 2008 Section).
  • Receipt of a clinical excellence award.
  • Tier 2 ill health retirement with an enhancement to your membership
  • Contributions paid to other pension savings arrangements, including the NHS AVC Scheme.

The following may increase your chance of breaching the annual allowance limit:

  • Paying significant amounts of additional pension
  • Linking of previous service in the NHS Pension Scheme
  • Paying significant amounts of pension contributions outside the NHS Pension Scheme
  • Taking Tier 2 Ill Health retirement

However, in these circumstances, up to three previous years of unused "carry forward" allowance may be used to reduce or offset the subsequent excess above the annual allowance.

Are there any exemptions?

There are some cases when the annual allowance restrictions will not apply, for example, death, terminal ill health or some tier 2 ill-health retirements.

The annual allowance in force up to 5 April 2011 does not apply in the year in which benefits came into payment or to those members with Enhanced Protection. However, these exemptions ceased from 6 April 2011.

What is "carry forward"?

If you exceed the annual allowance in any one year you can "look back" up to three previous tax years to see if you have any unused allowance from these years. If you do, you may be able to "carry forward" any unused allowance and add this to your allowance in the current year. This means that if your pensions growth exceeds the £50,000 in any one year, say due to a promotion, you may not have any extra tax to pay, depending upon your personal circumstances.

The maximum amount that can be carried forward is £50,000 for each of the 3 previous tax years, and is calculated on the current annual allowance rules.

What happens if I exceed the annual allowance?

If you exceed the annual allowance will be taxed at your highest marginal rate on the amount over the annual allowance. So, if your "pension input amount" is £65,000, then £15,000 may be subject to tax. However, you may be able to use "carry forward" to reduce or eliminate your annual allowance charge.

What is the NHS Pension Input Period?

The Pension Input Period is the period over which the annual allowance is worked out. In the NHS Pension Scheme it is normally 1 April to the following 31 March. This is shown in the examples in this document.

What is the Pension Input Amount?

The Pension Input Amount is the "capitalised" value of your pension and separate lump sum growth.

The "capitalised" value of your pension and separate lump sum is found by using the following calculation: (Pension x 16) + separate lump sum*.

To work it out you take the value of your pension and lump sum at the start of the Pension Input Period (plus an allowance for inflation) and subtract it from the value of your pension and lump sum at the end of the Pension Input Period. It is the result of this calculation (the "growth") that is measured against the annual allowance.

How will I know if I have exceeded the annual allowance?

It is a memberís responsibility to ensure that any annual allowance tax charges are worked out, declared and paid in time. HM Revenue and Customs (HMRC) rules require that members who are over the Annual Allowance and who have tax to pay must do so via self assessment, or via the Scheme Pays process if they meet the criteria. For 2011/12 the self-assessment deadline for declaring and paying any tax due is 31 January 2013.

The HM Revenue and Customs self assessment process enables members to estimate any tax payable on their tax return. Members will then have 12 months in which to correct any estimated information provided. Members wishing to find out more should visit the HMRC website at: www.hmrc.gov.uk

Members of the NHS Pension Scheme will normally be able to use the calculators and ready reckoners available on the NHS Pensions website or through their employers to estimate their annual allowance used in the NHS Pension Scheme.

Practitioners who build up Career Average Re-valued Earnings (CARE) benefits cannot use these tools and may therefore wish to consider discussing how to estimate their annual allowance use with our specialist advisers.

How will I know if I am over the Annual Allowance limit?

If you are over the annual allowance limit with either the NHS Pension Scheme or the NHS AVC Scheme then NHS Pensions will send you a pension savings statement. They will not automatically send a pension savings statement where the annual allowance is not exceeded.

Please remember the NHS Pension Scheme and the NHS AVC Scheme are separately registered pension schemes and you will only be supplied a pension savings statement from the scheme where the pension input amount exceeds the annual allowance.

If you have more than one pension provider you may have to ask each pension provider for a pension savings statement.

When will they write to me?

Provided all the relevant information is available to NHS pensions from your NHS employer to calculate the pension input amount they will write to you by 6 October each year if you have exceeded the annual allowance.

    For tax year 2012/13 - 6 October 2013

    For tax year 2013/14 - 6 October 2014

For the tax-year 2011/12 HMRC has allowed all pension schemes until 6 October 2013 to provide a pension savings statement.

If NHS Pensions have not received all the information from your employer they will send you a pension saving statement within 3 months of receiving the information.

The 2011/12 and 2012/13 pension savings statements will not be issued at the same time. The 2011/12 pension savings statements will be issued first, followed by the 2012/13 pension savings statements.

What is included in a Pension Savings Statement?

The pension savings statement will include the following information:

  • The amount of the annual allowance for the relevant tax year,
  • The pension input amount for the pension input period,
  • The pension input amount for the previous 3 pension input periods,
  • The amount of the annual allowance in the previous 3 relevant tax years.

The pension savings statement is not an annual benefit statement and will not include an estimate of your NHS Pension Scheme benefits.

Details of how to request an estimate of your NHS Pension Scheme benefits can be found at: www.nhsbsa.nhs.uk/Pensions/3364.aspx or you may wish us to obtain a statement of benefit on your behalf.

When will they send me a Pension Savings Statement if one is requested?

Provided NHS Pensions have received all the relevant information from your employer to calculate the pension input amount they will write to you by 6 October or within 3 months of receiving your request (requests can only be accepted from 6 April following the relevant tax year).

Please state if you want a statement for the NHS Pension Scheme or the NHS AVC Scheme; however remember that the NHS AVC providers will be issuing annual benefit statements.

What is a provisional Pension Savings Statement?

Type 1 and 2 Medical Practitioners and non-GP Providers will receive a provisional pension savings statement based on provisional pensionable profit/pay data provided by NHS Connecting for Health.

Final statements will be provided once all the relevant information is available following the completion of the annual certificates of pensionable profit/pay and NHS Pensions receiving confirmation from your PCT/CCG.

I am a General Medical Practitioner - when will my provisional Pension Savings Statements be sent out?

The provisional statements will be sent out within HMRC's time limits i.e. before the 6 October each year except for the tax year 2011/12 where all schemes have been given until 6 October 2013.

NHS Pensions aims to provide final pension savings statements for 2011/12 where pensionable profit/pay has been confirmed.

The pension savings statement for 2012/13 will be provisional.

The pension savings statement will confirm whether it is provisional or final.

You can assist NHS Pensions by completing your annual certificate of pensionable profit on time.

What about contributions to other pension arrangements?

Your total pension savings are subject to the annual allowance test so any contributions you are paying to other registered pension schemes will also need to be included when calculating how much your pension has grown by in any one year.

Can I get information from NHS Pensions about the Annual Allowance if I do not exceed the limit?

Members will be able to request a pension saving statements from NHS Pensions (for tax years 2011/12 and 2012/13) if necessary.

Remember you would only need these if you have pension provisions with other pension provider(s) and you need to add the pension input amounts together to determine your overall annual allowance position. Advice should be sought from a specialist financial adviser with expert knowledge of the NHS pension scheme.

Will NHS Pensions tell me if I have exceeded the Annual Allowance?

They will only provide you with the pension input amount for the relevant tax year and the three previous tax years (if available). You are responsible for establishing and calculating any annual allowance charge.

A calculator is available on HMRC's website at: www.hmrc.gov.uk/tools/pension-allowance/ or we can help you with this.

What happens if I exceed the Annual Allowance?

If you exceed the annual allowance there may be an annual allowance charge to pay.

How much is the Annual Allowance Charge?

The annual allowance charge is not at a fixed rate but will depend on how much taxable income you have and the amount of your pension saving in excess of the annual allowance.

To find out how much you will pay, you will need to work out the rate of tax that would be charged if your excess pension savings were added to your taxable income and based on your marginal income tax rate.

What is Carry Forward?

If you have any unused annual allowance from the previous three tax years you can use this to offset against an annual allowance charge in the relevant tax year.

If you exceed the annual allowance in the relevant tax year you can "look back" to up to three previous tax years to see if you have any unused allowance from these years. If you do, you may be able to "carry forward" this unused allowance and add it to your annual allowance limit in the current/relevant tax year. This means that if your pension growth exceeds the annual allowance, for example because of a promotion, increment or CEA you may not have an annual allowance charge to pay, depending upon your personal circumstances. Advice should be sought.

The maximum amount that can be carried forward is £50,000 for each of the three previous tax years, and is calculated on the current annual allowance rules.

An example would be were you exceeded the annual allowance by £15,000 in 2011/12 but you had unused annual allowance from the three previous tax years of £25,000 then you would not be liable for an annual allowance charge.

It is your responsibility to check whether you have any unused annual allowance from the preceding three tax years to carry forward to the relevant tax year being assessed. The pension saving statement provided by NHS Pensions will include the pension input amounts for the previous three tax years.

I am being made redundant, how do I know if I will be affected?

You will not be affected by being made redundant if your pensions" growth is usually below the annual allowance unless you receive an enhancement to your pensionable service. Any growth in excess of the annual allowance may be partially or fully offset by "carry forward" allowance.

Other redundancy payments which do not affect your pension or lump sum are not included in the annual allowance test.

I am retiring on ill health grounds, how do I know if I will be affected?

Members who retire on ill health grounds are not automatically excluded from annual allowance charges. If you are retiring on ill health grounds, you are more likely to be affected if you are eligible for ill health benefits which provide an uplift to your pension and lump sum.

This normally happens when you are awarded "Tier 2" ill health retirement benefits. Any growth in excess of the annual allowance may be partially or fully offset by the "carry forward" allowance.

HMRC have stated that their "Severe Ill Health" Test must be met in order for an individual to be exempt from the annual allowance in the year that they retire on ill health grounds.

The HMRC Severe Ill Health test is different, and in addition to the test members of the NHS Pension Scheme need to undergo in order to assess whether they qualify for ill health retirement benefits under the NHS Pension Scheme.

As part of your ill health application you may be asked whether you consent to the additional HMRC test being undertaken. This test can help to establish whether or not you are exempt from any annual allowance charge in the tax year that you retire. However, if the test is undertaken you may still be subject to an annual allowance charge, depending on the outcome of the test. >/

I am thinking of buying Additional Pension, how do I know if I will be affected?

When Additional Pension is purchased, this increases a memberís pension beyond any normal increases. This is more likely to affect higher earners, especially if they also have longer service.

If you are buying additional pension by lump sum of in excess of £2,500 pension then you are much more likely to be affected by the annual allowance.

How do I pay any annual allowance tax charge?

You can pay the charge yourself directly to HMRC using their self assessment tax return or in certain circumstances you can ask the pension scheme to pay the charge on your behalf - this is known as Scheme Pays.

Members of the NHS Pension Scheme who meet certain criteria may elect to pay their tax charge via a corresponding reduction to their benefits, rather than by directly paying the tax charge via their self assessment tax return.

This option, called "Scheme Pays" may only be elected if the following conditions are met:

  • The member exceeds the annual allowance in the NHS Pension Scheme in the relevant tax year from 2011/12 onwards
  • The member has an overall tax charge of more than £2,000 in the same relevant tax year
  • The member has not taken all their benefits in the NHS Pension Scheme

In these circumstances NHS Pensions may pay the tax charge on behalf of the individual member. There may be some limited circumstances in which NHS Pensions cannot pay the tax charge on the memberís behalf. In these instances you will be notified of this when you apply.

What is my responsibility in terms of disclosing my Annual Allowance Charge to HMRC?

It is your responsibility to ensure that any annual allowance charge is worked out, declared and paid in time to HMRC. The annual allowance charge must be declared to HMRC by completing a self assessment tax return. If necessary this can be obtained from HMRC by registering at: www.hmrc.gov.uk/sa/register.htm.

The self-assessment deadline for declaring and paying any tax due is 31 January following the end of the relevant tax-year.

HMRC's self-assessment process enables individuals to estimate any tax payable on their tax return. Individuals will then have 12 months in which to correct any estimated information provided. Members wishing to find out more should visit the HMRC website at: www.hmrc.gov.uk

Reduced Annual Allowance and Scheme Pays

HMRC have introduced the option for members of the NHS Pension Scheme to elect for the scheme to pay all or part of their NHS Pension Scheme annual allowance charge in relation to tax years from 2011/12 onwards in some circumstances Ė this is called ĎScheme Paysí .

There are 3 main conditions that must be met for the member to be able to qualify for this:

  • The member exceeds the annual allowance in the NHS Pension Scheme in the relevant tax year from 2011/12 onwards
  • The member has an overall tax charge of more than £2,000 in the same relevant tax year
  • The member has not taken all their benefits in the NHS Pension Scheme

In some other circumstances a member may not be able to elect for scheme pays, for example, if a member has a guaranteed minimum pension and their scheme pays election would mean that their benefits would be reduced below this level.

If the member elects for Scheme Pays, they will be subject to a permanent reduction in their benefits.

Where a tax charge arises in more than one pension scheme, members will only be able to ask NHS Pensions to pay the proportion of the tax charge that relates to the NHS Pension Scheme.

Members do not have to elect for Scheme Pays, and can choose to pay the tax charge via self-assessment instead. Tax on excess pension contributions Ė asking the NHS pension scheme to pay the annual allowance tax charge may be costly.

Scheme Pays

The NHS has announced that asking the scheme to pay will add interest at 3% each year plus Consumer Price Index (CPI) until you retire and then reduces the pension they take.

NHS Pensions may be able to help if the growth in your NHS Pension Scheme benefits exceeds the annual allowance and you have an annual allowance charge of £2,000 or more. You can ask us to pay your annual allowance charge; this is 'Scheme Pays'.

In simple terms scheme pays can be likened to NHS Pension 'loaning' you money now to pay your current tax bill which it will receive back with interest when you retire from your accumulated pension benefits.

Is there a Scheme Pays option for the NHS AVC Scheme?

Scheme pays is also available if your contributions to the NHS AVC Scheme exceed the annual allowance and your annual allowance charge is £2,000 or more. There will be a separate irrevocable election in respect of the NHS AVC Scheme.

I am considering Scheme Pays - what is an irrevocable election?

It is your decision to opt for scheme pays. It means that once you have completed, signed and sent the Scheme Pays Election Notice to NHS Pensions that your Annual Allowance your decision cannot be revoked or withdrawn at a later date, but it may be amended if the amount of the annual allowance charge changes.

When do I have to tell NHS Pensions I want to use Scheme Pays?

For both the NHS Pension Scheme and the NHS AVC Scheme you must send the Scheme Pays Election to NHS Pensions by the 31 July in the year following the tax- year the annual allowance charge applies.

For the tax-year 2011/12 only, this is extended to 31 December 2013.

When will the Scheme Pays amount be recovered?

In the NHS Pension Scheme the amount will usually be recovered when your benefits are paid at retirement, or if you transfer out of the Scheme.

In the NHS AVC Scheme it will be taken from your pension fund when the charge is paid to HMRC. If you elect for scheme pays but hold investments with more than one AVC provider it will be up to you to tell us from which provider and policy you want the annual allowance to be collected from.

How will it be recovered from my NHS Pension Scheme benefits?

By permanently reducing your pension and in the 1995 section your lump sum as well.

How much will it cost me?

The NHS Pensions Scheme will add interest to any scheme pays balance. Interest will be applied, based on the CPI figure every September plus 3%.

How will the total cost be recovered from my NHS Pension Scheme benefits?

The total balance will be converted by factors provided by the Scheme's Actuary into an amount to be recovered from your pension, and in the 1995 section your lump sum.

If you transfer out the total balance will be deducted directly from any transfer amount.

What and when is the relevant date?

The relevant date is the date from which interest is added to scheme pays balance.

This will be 1 January following receipt of your Scheme Pays Election Notice, for tax years 2011/12 and 2012/13 this will be 1 January 2014.

Can I make an election for Scheme Pays after I have retired?

No, NHS Pensions must receive you Scheme Pays Election Notice before you become entitled to your NHS Pension Scheme benefits.

I have Annual Allowance Charges in both the NHS Pension Scheme and the NHS AVC Scheme can all the charges be deducted from my NHS AVC Scheme?

No. The NHS Pension Scheme and the NHS AVC Scheme are registered separately by HMRC.

You cannot make an election requiring one registered pension scheme to pay all of your annual allowance charge liability where part of that liability relates to another registered pension scheme nor can you simply require each scheme to pay an equal share of your total liability.

What happens if I make a Scheme Pays election but die before retirement?

If you die whilst a member of the NHS Pension Scheme, then any recovery due because of scheme pays will be written off and your estate will receive the same level of benefits as if you didn't utilise scheme pays. If you are in the NHS AVC Scheme any benefits will be based on your pension fund after the reduction for Scheme Pays.

Will it affect my dependents benefits?

In the NHS Pension Scheme your dependents benefits will be based on your pension before any recovery for scheme pays.

In the NHS AVC Scheme it will be based on the value of your fund with which you buy an annuity after the reduction for scheme pays.

What happens if I exceed the Annual Allowance again?

The process will be repeated for each tax year in which a scheme pays payment is accepted.

Why have NHS pensions rejected my Scheme Pays request?

NHS Pensions do not have to pay your annual allowance charge, where:

  • NHS Pensions do not receive the Scheme Pays Election Notice within the specified time limits;
  • the pension input amount, in relation to either the NHS Pension Scheme or the NHS AVC Scheme does not exceed the annual allowance;
  • the annual allowance charge, in relation to either the NHS Pension Scheme or the NHS AVC Scheme is less than £2,000;
  • you are in receipt of your full pension entitlement under either the NHS Pension Scheme or the NHS AVC Scheme;
  • you are over age 75;
  • you transferred out of the Scheme;
  • you have taken a refund of contributions.

Deferred members

If you have been a deferred member for the whole of the input period (or a deferred member for part of the pension input period and retired) then you will have no pension input amount. Contributions to personal schemes would be subject to the annual allowance limit.