Most people will not be affected by the AA tax charge because the value of their pension savings will not increase in a year by more than £60,000.
The Annual Allowance (AA) is the limit to the amount of pension savings that can be paid each year before tax charges apply. The Annual Allowance applies across all schemes you belong to (not just benefits in the LGPS).
The standard AA limit is set by HM Treasury and is currently £60,000. However, this may be lower if you are subject to the Tapered Annual Allowance.
You are most likely to be affected if you
- are a higher earner
- have final salary membership in the LGPS, and you receive a significant pay increase
- pay a high level of additional contributions
We will write to anyone who has exceeded the standard AA limit before 6 October of the following year.
Calculating the Annual Allowance
The LGPS is a Defined Benefit (DB) scheme. In a DB scheme the growth in your pension is not measured by how much you and your employer have paid in contributions.
Measuring pension growth in the LGPS
- calculate the opening and closing values of your LGPS pension
- take the closing value and then minus the opening value from the start of the year
In the LGPS, your annual pension growth is calculated by looking at the value of your pension at the start of the tax year (6 April), which is then adjusted by inflation, and comparing this to the value of your pension at the end of the tax year (5 April).
Calculate the Opening and Closing Value of your pension
Opening Value
| Step One | Calculate your pension accrued at the start of the year |
|---|---|
| Step Two | Multiply this value by 16 |
| Step Three | Add any additional lump sum value |
| Step Four | Increase the total value by CPI |
Closing Value
| Step One | Calculate your pension built up by the end of the year |
|---|---|
| Step Two | Multiply this value by 16 |
| Step Three | Add any additional lump sum value |
| Step Four | Add any Additional Voluntary Contributions paid |
If the value of your pension benefits at the end of the year minus the value of your pension benefits at the start of the year is more than the AA, then you may have to pay a tax charge.
Examples of when AA should be calculated
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