Annual Allowance
and charges

What is the Annual Allowance?

The Annual Allowance is the maximum Pension Input Amount that can be paid each year into all of your pension arrangements without incurring a tax charge. The standard Annual Allowance for the 2017/18 tax year is £40,000. However, it could be reduced to a minimum of £10,000 a year depending on your adjusted income.


What does this mean for you?

The Annual Allowance will only affect you if you think your Pension Input Amount may have exceeded the £40,000 limit. If you think you might have exceeded the limits set by HM Revenue and Customs (HMRC) you may have a tax charge to pay. This is known as an Annual Allowance charge.

If you are likely to have an Annual Allowance charge then you will have received a pension savings statement to help you calculate whether you have exceeded the Annual Allowance. You will have received a pension savings statement if:

  • Your Pension Input Amount in the Plan has exceeded the standard £40,000 Annual Allowance in 2017/18, or
  • you earn over £75,000 p.a., or
  • you have requested a pension savings statement.

What do you need to do?

Review your pension savings statement

This will provide you with your Pension Input Amount from your benefits in the Plan. If you have other pension arrangements, you should also take any Pension Input Amount from these into account when calculating your total Pension Input Amount. This total Pension Input Amount is what you should use when determining if you have exceeded the Annual Allowance.

‘A guide to your pension savings statement 2017/18’ is included with your pension savings statement and will help you understand your statement and calculate your Annual Allowance.

Calculate your Annual Allowance

You can use the flow chart below to determine your Annual Allowance limit.

Details of your Annual Allowance limit, as well as definitions of the terms used in this chart are explained in the glossary in ‘A guide to your pension savings statement 2017/18’.

Establish if you have an Annual Allowance charge to pay

If your total Pension Input Amount exceeds your Annual Allowance for the 2017/18 tax year then you may have an Annual Allowance charge to pay.

If you have unused Annual Allowance from any of the three previous tax years you can use this to offset your pension savings that are in excess of the Annual Allowance. This is sometimes called ‘carry forward’.

To help you work out whether you can carry forward any unused balances from the previous three tax years, we have created the following examples below:


Example calculation 1 – Alexa

In 2016/17, Alexa’s Pension Input Amount of £34,000 exceeded her Annual Allowance of £32,500 by £1,500. However, she was able to use £1,500 of her available carry forward (£500 from 2013/14, £400 from 2014/15 and £600 from 2015/16) to ensure she was not liable for an Annual Allowance tax charge.

For 2017/18, her Pension Input Amount of £37,456 exceeded her Annual Allowance of £33,000 by £4,456. She was able to use £400 of her carry forward from 2015/16 to reduce her excess (£4,456 – £400 = £4,056). Alexa will have no carry forward to use in 2018/19.

 Pension Input Period  Annual Allowance  Pension Input Amount  Carry forward
 2017/18  £33,000  £37,456  £0
 2016/17   £32,500  £34,000  £0
 9 July 2015 to 5 April 2016  £0  £39,000   £1,000 (£600 used in 2016/17, £400 used in 2017/18)
 6 April 2015 to 8 July 2015  £80,000  £8,400  n/a
 2014/15  £40,000   £39,600  £400 (used in 2016/17) 
 2013/14  £50,000   £49,500   £500 (used in 2016/17)

Example calculation 2 – Ted

In 2016/17, Ted’s Pension Input Amount of £30,000 exceeded his Annual Allowance of £25,000 by £5,000. However, he was able to use £5,000 of his available carry forward from 2013/14 to ensure he was not liable for an Annual Allowance tax charge.

For 2017/18, Ted’s Pension Input Amount of £37,456 exceeded his Annual Allowance of £16,272 by £21,184. However, he was able to use £21,184 of his available carry forward (£15,000 from 2014/15 and £6,184 from 2015/16) to ensure he was not liable for an Annual Allowance tax charge. He will be able to use the remaining carry forward from 2015/16 of £15,816 (£22,000 - £6,184) in 2018/19.

 Pension Input Period  Annual Allowance  Pension Input Amount  Carry forward
 2017/18  £16,272  £37,456   £0
 2016/17  £25,000  £30,000  £0
 9 July 2015 to 5 April 2016  £0  £18,000   £22,000 (£6,184 used in 2017/18 leaving  £15,816)
 6 April 2015 to 8 July 2015  £80,000  £12,000  n/a
 2014/15  £40,000  £25,000   £15,000 (used in 2017/18)
 2013/14  £50,000  £20,000   £30,000 (£5,000 used in 2016/17)

Example calculation 3 – Corrine

In 2015/16 Corinne’s Pension Input Amount of £47,490 exceeded her Annual Allowance of £40,000 by £7,490. However, she was able to use £7,940 of her available carry forward from 2013/14 to ensure she was not liable for an Annual Allowance tax charge.

In 2016/17, Corinne’s Pension Input Amount of £44,124 exceeded her Annual Allowance of £10,000 by £34,124. However, she was able to use £34,124 of her available carry forward from 2014/15 to ensure she was not liable for an Annual Allowance tax charge.

For 2017/18, Corinne’s Pension Input Amount of £58,503 exceeded her Annual Allowance of £10,000 by £48,503. However, she was able to use £5,876 of her available carry forward from 2014/15 to reduce her Annual Allowance tax charge. She will have no carry forward to use in 2018/19.

 Pension Input Period  Annual Allowance  Pension Input Amount   Carry forward
 2017/18   £10,000   £58,503  £0
 2016/17  £10,000  £44,124  £0
 9 July 2015 to 5 April 2016  £0   £47,490  £0
 6 April 2015 to 8 July 2015   £80,000  £16,412  n/a
 2014/15  £40,000  £0   £40,000 (£34,124 used in 2016/17 and £5,876 used in 2017/18)
 2013/14   £50,000  £0  £50,000 (£7,940 used in 2015/16)

What happens if I have an Annual Allowance charge?

You will have to calculate if you have any carry forward by reviewing your Pension Input Amount and your Annual Allowance from the previous three tax years. You can find this information on your pension savings statement.

You will still have to pay your Annual Allowance charge. You can do this one of two ways:

Pay through Scheme Pays

Scheme Pays is a process that allows you to pay your Annual Allowance charge from your benefits in the Plan. If you choose this option, the Plan will pay your Annual Allowance charge directly to HMRC on your behalf. However, this will mean that your benefits in the Plan will be reduced. You will be eligible for Scheme Pays under the Plan if:

  • Your Annual Allowance is over £2,000; and
  • your Annual Allowance charge has resulted from an increase in benefits from the Plan; and
  • your Scheme Pays deduction is applied to benefits within the Plan.

If you think your Annual Allowance charge may be over £2,000 and you are interested in using Scheme Pays, you should request a ‘Scheme Pays quote’ by 24 October 2018 using the request form enclosed with your pension savings statement.

If you decide to elect for Scheme Pays, you will need to complete and sign the provided ‘Scheme Pays application’ form by 20 December 2018.

Pay via self-assessment

If you do not elect for Scheme Pays or your Annual Allowance charge is less than £2,000, you will be liable to pay the charge directly to HMRC via self-assessment. You must complete a self-assessment tax return by 31 January 2019 you can find more information about this at www.gov.uk/log-in-file-self-assessment-tax-return

Key dates

Action

Deadline date

Consider whether you want to seek independent financial advice

As soon as possible

Register for a self-assessment tax return, if you did not send one last year and have an Annual Allowance tax charge

By 5 October 2018

Request a Scheme Pays quote. You will then receive a Scheme Pays quote by 21 November 2018

By 24 October 2018

Return a Scheme Pays application form

By 20 December 2018

Notify HMRC of the tax charge (if one applies to you)

By 31 January 2019
                       

Where can you find help?

We have appointed WEALTH at work to operate a free dedicated telephone helpline to answer any questions you may have about your Annual Allowance. The helpline can help you understand and work out what your tax liability is based on your own personal circumstances and, they can also offer advice around Annual Allowance as part of your retirement plans if you have more complicated financial needs. Call 0800 0931462 to speak to a member of the WEALTH at work guidance team.

If you are concerned about how tax may affect your pension benefits, you can use the Money Advice Service to find an independent financial adviser in your area.

Tax is your individual responsibility and we cannot complete or assist you with any tax liability calculations. You can find more information about tax or self-assessment on the HMRC website at www.gov.uk/tax-help


Contact us

You can contact WEALTH at work on 0800 093 1462. Or for more general enquiries contact the pensions team on:

Email: pensions.helpline@pearson.com
Freephone: 0800 7811378
Please note we are unable to provide you with financial advice.

Discounts

Aviva is offering additional discounts to its online premiums for car, home and travel insurance to new Aviva customers.

To find out more go to www.aviva.co.uk/affinities/pearson where you can find details of the products available and any eligibility criteria that may apply.

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