Annual Allowance Employee Guide 2023/24

Annual Allowance

Employee Guide 2023/24

The Annual Allowance

The Annual Allowance (AA) is designed to limit the

amount of tax relief you can receive on pension

savings each year. It is a limit on the total amount

of contributions that can be paid to Defined

Contribution (DC) pension schemes from any source

(employee, employer and any third party), and a

limit on the total amount of benefits that can build

up in Defined Benefit (DB) pension scheme(s) each

year, for tax relief purposes.

The standard AA for the 2023/24 tax year has

increased from £40,000 to £60,000; however personal

contributions are also restricted to 100% of relevant

earnings, if these are lower. Depending upon

your circumstances, your AA may differ from the

standard £60,000. This is explained in more detail

later in this document.

The Annual Allowance Charge

Any annual increase in pension savings that is

over your AA will suffer a tax charge. This annual

allowance charge is applied to the excess amount

only and is designed to broadly recover the tax relief

given on the excess contributions (or excess benefit

accrual within a DB scheme).

If you have exceeded your AA you will need to

pay this tax charge via your self-assessment tax

return. In some circumstances, such as if the charge

exceeds £2,000, it may be possible to pay the charge

from your pension fund. You should speak to your

pension provider to find out what is permitted and

what their procedure is for this as special rules

apply. Details of when this may apply, and how to do

this, can be found at the following link.

https://www.gov.uk/guidance/who-must-paythe-

pensions-annual-allowance-tax-charge

Following the Spring Budget 2023, the

standard Annual Allowance for the 2023/24 tax

year has increased from £40,000 to £60,000,

and the Money Purchase Annual Allowance has

increased from £4,000 to £10,000.

The adjusted income threshold for the tapering

of the standard Annual Allowance has also

increased from £240,000 to £260,000 for the

2023/24 tax year, with threshold income

remaining at £200,000. The minimum Tapered

Annual Allowance has increased from £4,000 to

£10,000.

Please note that the annual allowance charge does

not apply in the tax year that the individual dies.

This is because for the tax year in which an

individual dies their total pension input amount

(pension saving) is set at nil. Special rules also apply

in the case of retirement due to serious ill-health.

Full details can be found here –

https://www.gov.uk/hmrc-internal-manuals/

pensions-tax-manual/ptm051200

Tapering of the Annual Allowance

The tapering of the AA was first introduced in April

2016. As of 6 April 2023, individuals with a threshold

income of more than £200,000, and an adjusted

income of more than £260,000 in a tax year, will

have their AA reduced. Government guidance

states that an individual’s AA will not be reduced

if their threshold income for the current tax year

is £200,000 or less, no matter what their adjusted

income is.

This reduction is applied by tapering the AA by £1

for every £2 earned over £260,000. The maximum

reduction applied (for those earning £360,000

or more) is £50,000, leaving an AA of £10,000. See

the table of examples that show the reductions

applicable.

Threshold Income

Broadly speaking threshold income includes all

taxable income for the tax year (less a few specific

deductions and adjustments for certain taxable

death benefits), plus any income you have given

up through a salary exchange arrangement

commencing after 8 July 2015.

However, any income you have given up under a

salary exchange arrangement can be excluded if the

arrangement commenced before 9 July 2015 and

hasn’t subsequently been renewed or increased.

*wher

e threshold income is more than £200,000

Threshold income excludes employee pension

contributions. Therefore, increasing employee

pension contributions paid through a net pay

arrangement or relief at source, can reduce

threshold income.

Adjusted Income

Adjusted income is also, generally speaking,

your total taxable earnings for the tax year (with

similar adjustments as per threshold income).

However, it includes your pension contributions

and, in respect of a DC scheme, any employer

pension contributions received for the same period

(including those made using salary exchange). In

the case of benefits in a DB pension scheme, it

includes the value of pension savings built up in the

scheme over the tax year.

If your earnings are above the adjusted income

threshold, the usual methods of reducing

taxable income by entering into salary exchange

arrangements or increasing pension contributions

will not be effective for the purposes of reducing

your adjusted income. Both personal contributions

to pension arrangements and employer

contributions, are taken into account when

calculating adjusted income, so there is limited

scope for planning opportunities.

Examples of taxable earnings include salary,

commissions, bonus, benefits in kind, rental

income, dividend payments and interest on most

savings. This list is not exhaustive. The calculation of

threshold and adjusted income is complex. Further

details can be found here –

• https://www.gov.uk/guidance/pensionschemes-

work-out-your-tapered-annualallowance

• https://www.gov.uk/hmrc-internal-manuals/

pensions-tax-manual/ptm057100#Income

Please note that Mercer Marsh Benefits are not tax

advisers, and that this guide is designed to give an

overview only. It is not intended to be used as a step

by step guide to calculating your adjusted income

and threshold income and should not be construed

as tax advice or relied on for this purpose. Given the

complexities involved, you may wish to speak to a

financial adviser on how to calculate your adjusted

income and threshold income.

See the example at the end of this document of how

the tapering of the AA can work in practice.

Pension Input Period

A pension input is another term for pension

savings and includes (but is not limited to) member

contributions, employer contributions and the value

of any increase in benefits in a DB scheme.

Pension Input Periods (PIPs) are the period over

which contributions are tested against the AA. With

effect from 6 April 2016 they were simplified to align

with tax years.

Carry forward availability

If you have used all your AA for the current tax

year, you may carry forward any allowance you did

not use from the previous three tax years (taking

unused allowance from the earliest tax year first).

The 2023/24 tax year therefore allows use of unused

allowance from the 2022/23, 2021/22 and 2020/21

tax years.

Increasing the standard AA from £40,000 to £60,000

will potentially increase the scope for members to

carry forward any unused allowance in future years,

assuming it remains at this level. In addition,

increasing the adjusted income threshold for the

application of tapering of the standard AA to

£260,000, and also increasing the minimum Tapered

Annual Allowance (TAA) to £10,000 means that high

earners will also see an increase in their TAA,

potentially giving some greater scope to carry

forward any unused allowance.

You cannot use carry forward to pay a contribution

to a money purchase (DC) plan if the Money

Purchase Annual Allowance applies.

For contract based pension schemes, such as

a personal pension, your pension provider will

be able to provide you with details of your total

contributions for each relevant PIP, to help you work

out if you have any unused allowances. If you pay

into more than one pension arrangement in any tax

year, you will need to ask for contribution details

in respect of each scheme in order to work out the

total contributions paid for each relevant PIP. You

may wish to obtain financial advice in this area.

• taking an annuity (other than a flexible annuity as

outlined above),

• taking a small pot payment (pension freedom

rules allow three pots of up to £10,000 to be

withdrawn from a non-occupational DC pension).

Your pension provider will send you a flexible access

statement within 31 days of flexibly accessing your

pension for the first time.

Any DC savings made after the date the MPAA

is triggered will be tested against this £10,000

allowance. Any DC savings made in the same tax

year before it was triggered, will be tested against

the Alternative Annual Allowance, along with any DB

benefits earned.

The Alternative Annual Allowance is essentially your

standard AA (less any tapering if applicable and

including unused AA carried forward) less the MPAA.

For example, for the 2023/24 tax year, if you are

entitled to a standard AA of £60,000 and you trigger

the MPAA in that tax year, your MPAA would be

£10,000 and your Alternative Annual Allowance

would be £50,000. For the 2023/24 tax year only, any

DC savings made before the trigger event would

be tested against the £50,000 allowance, along

with any DB benefits earned in the same tax year

(if applicable). DC savings made after the trigger

event would be tested against the £10,000

allowance. In the following tax year, 2024/25,

(assuming the allowances remain the same), only DB

benefits earned for that tax year would be tested

against the £50,000 allowance, with all DC savings

being tested against the £10,000 allowance.

Details of an individual’s

contributions

Individuals may receive a statement from their

pension provider if they exceed the standard AA

for that scheme. Individuals who are at risk of

exceeding their AA (especially those subject to

tapering), and/or who contribute to more than one

pension scheme, should ask all of their pension

providers for a statement each tax year so that they

can work out how much they have contributed in

total over the period.

Money Purchase Annual Allowance

(MPAA)

This is a specific allowance in respect of DC pension

savings, and is triggered when you flexibly access

your pension savings using the pension freedom

options. It applies to the tax year it was triggered,

and to subsequent tax years. With effect from the

2023/24 tax year the MPAA is £10,000.

Paying pension contributions after starting to draw

benefits can be complex and we recommend you

seek advice from an authorised financial adviser.

You will trigger the MPAA test if you do any of the

following:

• take an income withdrawal from a Flexi Access

Drawdown (FAD) plan,

• take an uncrystallised funds pension lump sum

(UFPLS),

• you have a capped income drawdown plan (that

came into effect before 6 April 2015) and

• choose to convert it to a FAD, or

• your income exceeds the capped amount,

• you become entitled to a lifetime annuity on

or after 6 April 2015 that can reduce in amount

(specific rules apply).

This list is not exhaustive as other circumstances

also exist which can trigger the MPAA. Full details of

the MPAA trigger events can be found here –

https://www.gov.uk/hmrc-internal-manuals/

pensions-tax-manual/ptm056520

Events that will not trigger the MPAA test are as

follows (again this list is not exhaustive):

• taking a pension commencement lump sum

(PCLS) from a FAD (without also taking an

income),

• taking income from a capped drawdown fund

which is within the capped amount,

Let’s look at an example of the tapered Annual Allowance

Anna

earns £240,000 in 2023/24.

Anna pays a 6% employee pension contribution into her workplace DC pension scheme. In addition to this

Anna also benefits from a 12% employer pension contribution into her workplace DC pension scheme.

Anna’s threshold income is £240,000 less her 6% employee pension contribution (£14,400) = £225,600.

As Anna’s threshold income exceeds £200,000, her income needs to be tested to get her ‘adjusted income’.

Anna’s adjusted income for the tax year is her taxable income (before employee pension contributions are

deducted as these are included when calculating adjusted income) plus her employer pension contribution.

Anna’s adjusted income is £240,000 plus her employer’s 12% contribution to her workplace DC pension

scheme (£28,800) = £268,800.

So, Anna’s threshold income is greater than £200,000, and her adjusted income is greater than £260,000. As

a result Anna’s AA for 2023/24 will be tapered as follows:

Value of adjusted income in excess of the

2023/24 threshold

£268,800 – £260,000 = £8,800

Annual Allowance reduction £8,800 ÷ 2 = £4,400

New Annual Allowance £60,000 – £4,400 = £55,600

However Anna’s total pension contributions of £43,200 are within her tapered AA and so no tax charge will

be payable.

Tapered Annual Allowance (2023/24)

12.12.23 v1

portant Notices

This document is based on our current understanding of legislation, taxation and HMRC practice, which

may change in the future, for example if Government policy changes.

This document is for information only and is not personal financial advice. If you require financial advice you

should seek this from an authorised financial adviser.

Please also note that we are not lawyers or tax advisers and nothing in this document should be construed

as legal or tax advice or relied on for this purpose. We strongly recommend that you seek appropriate advice

in relation to matters of law and taxation.

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Help

If you are potentially affected by the tapering of the AA, financial planning can be complex. Consideration of

the two thresholds, any carry forward availability, and the possible application of a salary exchange scheme,

in order to avoid or reduce any tax charge, can be very difficult. Furthermore, it is not always possible

to determine your adjusted income until the end of the tax year, yet this directly affects any tapering

calculation for the tax year, and your ultimate tapered AA.

Application of the MPAA can also catch individuals unawares should they decide to take advantage of the

pension freedom options.

It is therefore recommended that you obtain authorised financial advice if you are affected by any of these

issues, to assist you with your tax and pension planning.