Annual Allowance

What is it?

An Annual Allowance for pension savings applies each year, which is based on a period of 12 months from the the beginning of tax year. In other words it is the amount of pension contributions available on pension savings for each tax year. The Annual Allowance for most is currently £40,000 (correct as at 2018/19 tax year). This is the maximum you or someone else, e.g. the Company, can contribute to all your pensions in one tax year, without incurring a tax charge. It also includes any benefits accrued in a final salary pension.

However, from April 2016 the Government will be introducing a a new type of Annual Allowance which will only impact individuals who have total earnings of £150,000 and above. This is called Tapering Annual Allowance and the rules around this are very complex. Further information regarding tapering can be found by clicking here.

In addition, since the Freedom & Choice options were introduced in April 2015, the Government introduced another type of Annual Allowance called the Money Purchase Annual Allowance. More information can be found below.

Key Words

Before we explain how your Annual Allowance should be calculated please make a note of these key words:

Pension Input Amount (PIA) = this is the amount you can contribute to all your pension arrangements in one year without incurring a tax charge, or for final salary purposes, the amount of benefits accrued.

Pension Input Period (PIP) = this is the period over which a PIA is calculated for a pension scheme. For the Kingfisher Pension Scheme, it is from 1 April to 31 March for any given year.

Under a money purchase, like the KPS-MP, this is simply the value of the contributions paid during the Pension Input Period (PIP). This includes all member, company and third party contributions.

Under a final salary, like the KPS-FS, it is the increase in the value of a your benefits during the PIP. The calculation is complex however here is a brief step by step guide:

Step 1

To calculate the value of your benefits at the start of the PIP you must take the annual pension amount at the beginning of the PIP and increase it by the CPI over the 12 month period to the September before the start of the tax year in which the Annual Allowance is being calculated. For example for the 2011/2012 annual allowance calculation the CPI increase is 5.2%. This amount should then be multiplied by 16.

PIA (start of PIP) x Sept CPI x 16 = Benefits Value A

Step 2

To calculate the value of your benefits at the end of the PIP, you must take the annual pension amount at the end of the PIP and multiply by 16.

PIA (end of PIP) x 16 = Benefits Value B

Step 3

To calculate the amount of allowance used, deduct the value of your pension at the start of the tax year from the value of your pension at the end of year from each other.

A – B = Allowance used for PIP.

If the final value is above the Annual Allowance for the PIP, then you may find you have an annual allowance tax charge.

The Summer 2015 Budget announcement confirmed a number of changes to the Annual Allowance, specifically aimed at “higher earners”, by reducing the amount of tax relief they can receive on their pension contributions. These changes will come into effect from 6 April 2016.

The Annual Allowance will be reduced from the current £40,000 p.a. if both of the following criteria apply:

  1. Your “threshold” income is over £110,000; and
  2. Your “adjusted” income is over £150,000.

In simple terms your “threshold” income is your total gross income without adding back any contributions you and anyone else have made and your “adjusted” income is your total gross income including any pension contributions made.

Where your adjusted income falls between £150,000 and £210,000 the personal allowance is calculated on a tapering basis to fall between £40,000 and £10,000. The tapering works by reducing the Annual Allowance by £1 for every £2 when your adjusted income exceeds £150,000. However, the maximum reduction that can apply to the Annual Allowance is £30,000, which leaves a minimum Annual Allowance of £10,000 available.

Will you be affected by the changes?
Unfortunately this is not a straight forward question to answer since the amount of tax relief on pension contributions available to you will now be linked to your total earnings in the year. This will include variable elements such as bonus payments or share exercises and also include external income from sources outside the Company, such as property rental or dividend income.

In addition you may have carry forward available from unused allowances in the three previous tax years which may allow you to build your Annual Allowance back up.

What should you do next?
There is no immediate action required from you if you conclude that:

  • Your Threshold income falls below £110,000
  • Your Adjusted income falls below £150,000 or carry forward will offset the impact a tapering relief

However you must regularly review your position against the Annual Allowance should your circumstances change and contact Kingfisher Group Pensions Team if you are still employed by the Company for assistance.

Individuals with higher salaries should seek independent financial advice in connection with the calculation of their adjusted income and threshold income, taking account of earnings received from various sources, to identify whether their Annual Allowance is to be tapered from 2016/17 onward.

Active members who calculate that they have an adjusted income of between £150,000 and £210,000 should then consider requesting a Pension Savings Statement from the KPS.

The KPS has a duty to provide you with a Pension Savings Statement should you exceed the standard Annual Allowance in a tax year. The Trustees will not automatically send you a Pension Savings Statement if you have exceed your tapered Annual Allowance.It is therefore important for you to contact Kingfisher Group Pensions Team should you require a Pensions Savings Statement.

If you have unused Annual Allowance from the previous three tax years, you can use the unused amount in addition to the allowance you have for the PIP in question. This is called the carry forward method.

The HM Revenue & Customs has created calculators on their website to calculate the carry forward for you. You can use these calculators to work out whether you have any unused Annual Allowance that you can carry forward to a current tax year provided you were a member of a registered pension scheme, or qualifying overseas pension scheme, at some time during all of the previous 3 tax years.

There is the standard pension savings Annual Allowance calculator, which can be accessed here. Full information regarding all the available calculators and links to further Annual Allowance calculators can be viewed here.

There are other conditions in place for this and to find out more please refer to the further information links below or contact Group Pensions.

If you have exceeded your Annual Allowance with Kingfisher Pension Scheme, we will write to you, no later than the October following the end of the tax year it is in respect of.

However if you have other pension arrangements which you contribute to during the year you will need to take these into account as well. If you do not receive a statement this year but would like one please contact Group Pensions in writing and we will be happy to provide one to you.

If you have taken flexible benefits which include income, such as an ‘Uncrystallised Funds Pension Lump Sum (UFPLS)’ or flexi-access drawdown with income, and you want to continue paying contributions to a defined contribution pension scheme (like the KPS-MP), you will have a reduced Annual Allowance of £10,000 towards your defined contribution benefits. The reduced allowance will apply if you have withdrawn more than the 25% tax free pension commencement lump sum (PCLS). The reduced amount is known as the ‘Money Purchase Annual Allowance’ (MPAA) and includes both your own contribution and any other contribution paid on your behalf, such as the Company or a third party. You cannot bring forward any unused annual allowances from the previous three tax years to warrant a higher contribution than £10,000 towards your defined contribution benefits.

The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits and so any previous savings are not affected.

Your pension provider has to formally tell you of the date that you flexibly accessed your pension benefits, including an explanation of the possible implications, within 31 days of the trigger date. You will then be required to pass on the information you have received from the pension provider you flexibly accessed funds from to all other administrators of money purchase pension schemes you are contributing to within 91 days.

Further information regarding the Annual Allowance and the respective charges can be found on the HM Revenue & Customs website.