The contributions you make to the Local Government Pension Scheme (LGPS) are tax free up to certain limits.
HMRC impose two controls on the amount of pension savings you can make without having to pay extra tax, these are:
This is in addition to any income tax you pay on your pension once it is in payment.
The AA and LTA impact not just on your Local Government Pension but all other pensions you have or are paying into. The rules surrounding tax and your pensions are complex. You may want to consider financial advice to help look at your individual tax position.
What is the annual allowance?
The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. If your pension savings (from all your pension arrangements) exceed the AA in any one year the excess amount is taxed as income.
The AA applies to your total pension savings for all tax registered pension schemes that you pay into. This means that you will need to obtain the growth in your pension savings from each pension you are contributing savings to.
The previous AA, up to April 2023, was £40,000, although this was tapered down if your threshold income was greater than £200,000, and your adjusted income was greater than £240,000.
The current standard annual allowance is £60,000, and the adjusted income for the tapered annual allowance is £260,000.
Most people are not likely to be affected by the AA because the amount their pension savings increase by during the year will be less than £60,000.
If you think your total pension savings have increased by more than the AA, you can look into whether you may have 'carry forward' from the previous three years to offset the excess over £60,000. We will write to anyone who has exceeded the AA before 6 October that year.
Pensions in the LGPS grow in line with your pensionable salary, not your pension contributions, so a significant increase in salary can subsequently have a large impact on your pension growth.
How is the annual allowance calculated?
Your pension growth is measured over a 'pension input period' (PIP). From 6 April 2016, PIPs for all pension schemes are aligned with the tax year (6 April to 5 April).
Your annual pension growth is calculated by looking at the value of your pension at the start of the PIP (6 April), which is then adjusted by inflation, and comparing this to the value of your pension at the end of the PIP (5 April).
In the LGPS the value of your pension is worked out by multiplying the amount of your annual pension by 16 plus any automatic lump sum you are entitled to. You'll also need to add any additional voluntary contributions (AVCs) you or your employer has paid during the year.
What if I owe tax?
If you have an AA tax charge that is less than £2,000 you must pay the charge direct to HMRC via your self-assessment tax return by 31 January following the year in which your tax charge arose.
If your tax charge is more than £2,000, and providing certain conditions are met, you may be able to elect for SPF to pay some or all of your tax charge on your behalf and in return we would reduce your LGPS pension accordingly. This is called the scheme pays facility.
Guidance on self-assessment, including scheme pays
If you exceed the AA limit in any year and have a tax charge to pay, you are responsible for reporting this to HMRC on your self-assessment tax return. You will need to complete the additional information pages (SA101) of the tax return (relating to 'Pension savings tax charges) to show the amount by which your total pension input amount exceeds the AA.
If you are using the 'scheme pays' facility to instruct SPF to pay your tax charge to HMRC on your behalf, you will need to input the pension scheme tax reference (PSTR) into form SA101. For SPF this is 00822212RH.
If you are using a paper return, you will need to ask for the additional information pages (SA101) to report the information.
If you've never completed a tax return, you will need to complete a registration form at least 20 days before the deadline to let HMRC know what's changed and to get a tax return.
The deadline for submitting online tax returns is 31 January after the year in which the tax charge has arisen (or 31 October for paper returns).
For further information to help complete a tax return please visit the gov.uk website.
If you exceed the AA limit but do not have a tax charge to pay (because you have enough carry forward to wipe out the amount by which you exceeded), there is no further action required and you do not need to report anything to HMRC.
You can ask us to pay some or all of your annual allowance tax charge on your behalf in return for a permanent reduction to your LGPS pension.
If you have exceeded the standard annual allowance by more than £2000, this is done through mandatory scheme pays.
If you have been affected by the tapered annual allowance, this is done through voluntary scheme pays.
To be able to use this facility, you must make sure that certain conditions are met.
With mandatory scheme pays:
SPF will pay the tax charge on your behalf in exchange for a permanent reduction to your Local Government Pension.
The reduction that we apply to your pension is determined by a set of prescribed factors. These factors vary depending on your age and how close to retirement you are.
The reduction (called your 'scheme pays pension debit') will increase each year in line with inflation. When you come to retire, the pension debit will be adjusted to reflect the date your pension comes into payment. If you retire before or after your normal pension age, the pension debit will be reduced or increased accordingly.
Scheme pays pension debits are not applied to contingent survivor benefits and other death related benefits.
Voluntary scheme pays relates to those affected by the tapered AA, if you do not wish to use scheme pays on a voluntary basis, you may wish to pay this element of your tax charge direct to HMRC. In this case, you can still use our scheme pays facility to pay the rest of your tax charge on a mandatory basis.
Conditions for scheme pays
The growth in your LGPS benefits (your pension savings or pension input amount) must exceed the AA in the relevant tax year; and
Your AA tax charge liability for the relevant tax year, as a result of the growth in your LGPS benefits, must be £2,000 or more; and
The tax charge you elect for us to pay on your behalf must be solely in respect of the growth in your LGPS pension benefits with SPF; and
You must complete and return your signed election form before the deadline of 31 July following the year after your tax charge arose (for example, for a tax charge in respect of the 2022/23 year, the deadline is 31 July 2024).
What is the lifetime allowance?
Lifetime Allowance (LTA) is a limit on the total value of pension benefits you can have before restrictions apply.
The current standard LTA is £1,073,100 but nobody will face a lifetime allowance charge for exceeding the limit for 2023/24. From April 2024, the Government has said the lifetime allowance will be abolished entirely.
The lifetime allowance also limits the amount of tax free cash you can take from any pension.
The LTA covers all pension benefits you have in tax registered pension arrangements (including the Local Government Pension Scheme (LGPS)). The limit usually increases each year in line with consumer price indexing (CPI).
LTA does not include:
- Any state pensions
- Any partner's or dependant's pension you may be entitled to.
If the value of your pension benefits when you draw them is more than the LTA or more than any protections you may have; you will have to pay income tax on the excess benefits.
How do I work out the value of my benefits?
For pensions that started to be drawn on or after 6 April 2006:
Annual pension x 20 + Lump sum + AVCs = Capital value
(Factor provided by the Government)
For pensions in payment before 6 April 2006:
Annual pension x 25 = Capital value