HM Revenue and Customs (HMRC) limits the amount of pension savings you can make without having to pay extra tax. There are limits on:
- the amount of pension savings you can make in a year, and
- the total amount of pension savings you can have in all pension schemes.
These limits are called the annual allowance and the lifetime allowance. This is in addition to any income tax you pay on your salary or pension when they are paid to you. Most people will be able to save as much as they wish because their pension savings are less than the allowances.
There is no limit on the amount of pension contributions you can pay. You will not get tax relief on all your contributions if you pay more than your taxable pay into your pension in a tax year.
Annual Allowance
The annual allowance is the amount your pension savings can increase by in a year without you having to pay extra tax. If your savings increase by more than the annual allowance, you will have to pay tax on the excess. The standard annual allowance increased from £40,000 to £60,000 on 6 April 2023.
Further information can be found on the LGPS Member website and also on HMRC’s website.
Lifetime Allowance
The Government has announced that no-one will pay a lifetime allowance tax charge from 6 April 2023. If a tax charge arose before this date, it is still payable. The lifetime allowance was abolished completely from 6 April 2024.
Although the lifetime allowance limit is now abolished, the following limits apply from 6 April 2024:
A lump sum allowance limit of £268,275: This is the total tax-free lump sum you can receive from all your pensions, including your LGPS pension, unless you have a valid protection certificate that entitles you to a higher tax-free amount. Any lump sum in excess of this limit will be taxed at your marginal rate. The figure of £268,275 is known as the Lump Sum Allowance (LSA) and there is no provision within the legislation for the LSA to increase.
A lump sum death benefit allowance (LSDBA) of £1,073,100: This is the total tax-free lump sum amount that can be paid from pensions to beneficiaries if someone dies before age 75. Any lump sum in excess of this limit is taxed at the beneficiary’s marginal rate.
An overseas transfer allowance of £1,073,100: This is the total value of pensions you can transfer to a Qualifying Recognised Overseas Pension Scheme (QROPS). Any amount in excess of this limit will be subject to a 25% tax charge.
When you are paid either a LSA or a LSDBA, we will check it fits within the available limit.
Before 6 April 2023, if the value of your pension benefits when you took them was more than the lifetime allowance, or more than any protections you held, you had to pay tax on the excess benefits. This did not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to.
The lifetime allowance covered any pension benefits you had in all tax-registered pension arrangements – not just the Local Government Pension Scheme (LGPS).
Further information can be found on the LGPS Member website.