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Tax Allowances

Income Tax

Your LGPS pension is taxable, but your lump sum is paid tax free. Whether you pay tax when you retire depends on the amount of your pension and your personal circumstances.

 The Fund will notify HM Revenue & Customs that you are in receipt of your pension and a new tax code will be issued. If your tax code is not known immediately, a temporary code will be used until we have received the correct information.

If you wish to make an enquiry about your tax coding please contact your local tax office.

Your Local Tax Office

If you have any question about your tax you should contact the tax office, quoting your National Insurance number.

HM Revenue & Customs
South Wales Area
Ty Glas
Llanishen
Cardiff
CF14 5YA
Tel: 0300 200 3300
 

What is the Annual Allowance?

The Annual Allowance is the amount by which the value of an individual’s pension benefits may increase in any one year (the Pension Input Period) without having to pay an excess tax charge. This amount is set by the Treasury and was reduced from £255,000 to £50,000 on 6th April 2011 and decreased again in 2014/15 to £40,000. The value of your pension savings every year is shown on your Annual Benefit Statement as the Pension Input Amount.

If this limit is exceeded in any year and a tax charge is due  you can pay the tax charge directly to HMRC or, if the charge is over £2,000 you  can ask the scheme to pay the tax for them in return for a reduction in their pension benefits.  You are  responsible for notifying HMRC via your self assessment tax return if you are liable to a tax charge.

How will the unused Annual Allowance work?

If the increase in your pension benefits exceeds the Annual Allowance  in a Pension Input Period you can carry forward any unused  allowance from the previous 3 years. This is to prevent a tax charge arising from any sudden increase in value of pension benefits as a result of a pay increase for example.

Further information on the Annual Allowance charge can be found by accessing the HMRC website by clicking here or reading the LG Factsheet which can be accessed here http://www.lgpsregs.org/resources/guidesetc.php

The Pension Fund will write to you if you have exceeded the Annual Allowance.

Example

An individual’s pension benefits for 2016/17 were £70,000 and has therefore exceeded the £40,000 annual allowance by £30,000.

The member can now carry forward tax relief from the previous 3 years starting with the oldest first:

Tax Relief Table

Year

Increase in benefit

Tax Relief

Unused Relief

Carry forward

2015/16

(Second Part

Year PIP)

£15,000

£40,000

£25,000

£25,000

2015/16

(First Part 

Year PIP)

£18,000

£80,000

£68,000*

£68,000

 2014/15

£32,000

£40,000 

£8,000 

£8,000 

 2013/14

£48,500 

£50,000 

£1,500 

£1,500 

The member can now use the unused relief from 2013/2014, 2014/2015 and the Second Part Year PIP to offset the excess.

To determine the amount of tax to be paid the excess over the Annual Allowance needs to be included in the HMRC Tax Self Assessment process.

Scheme Pays Election

Once the tax charge has been determined you have  the choice of making an election for the Pension Fund to pay some or all of their annual allowance charge liability on their behalf out of the individual’s pension savings, as long as certain conditions are met.

To be eligible, the growth in your benefits in the Local Government Pension Scheme in the relevant tax year needs to exceed £40,000 and the amount of the Annual Allowance Charge for which you are liable for the relevant tax year exceeds £2,000. In return, there will be an appropriate reduction to your pension benefits within the scheme.

If you wish to complete a Scheme Pays Election Form please click here|

The deadline for making an election is 31 July in the year following the tax year in which tax charge becomes due. So for a tax charge incurred for 2016/17 you need to elect by 31 July 2018.

We will provide an acknowledgement that your election has been received and recorded, if you do not receive an acknowledgement within 1 month then please contact our Pension Helpdesk.

What is the Lifetime Allowance?

The maximum value of pension benefits that an individual may accrue during their lifetime without incurring a tax charge is known as the Lifetime Allowance (LTA). The limit is set by the Treasury and for 2017/2018 is £1 million.

All pension benefits in registered pension schemes count towards the lifetime allowance. This includes Additional Voluntary Contribution Funds (both Free-Standing and In-house), personal and group personal pensions, stakeholder pensions, retirement annuity contracts, rights preserved in other occupational schemes, pensions already in payment and pension credits derived from divorce settlements.

Every time you draw benefits from a pension arrangement after 5th April 2006, you should be told by the pension provider, the percentage of the lifetime allowance used.

When you become entitled to receive a pension benefit, you will have to advise your pension provider of the amount of lifetime allowance already used.

Should the total value of your pension rights exceed the lifetime allowance, your pension rights will be subject to a tax charge – in addition to the normal application of income tax.

To access the Lifetime Allowance calculator please click here.

 Click http://www.lgpsregs.org/resources/guidesetc.php for a  Lifetime Allowance Factsheet.

As the Lifetime Allowance has changed HMRC have introduced protections for pension scheme members –

Individual Protection 2016 (IP2016)

You can apply for Individual Protection 2016 from 6 April 2016 if you have pension savings valued at over £1 million (including taking into account past benefits already in payment) on 5 April 2016.  However if you have primary protection or individual protection  2014 you can’t apply for IP2016.

IP2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016 – up to an overall maximum of £1.25 million.  You will not lose IP2016 be making further savings in to your pension scheme but any pension savings in excess of your protected lifetime allowance will be subject to a lifetime allowance charge.

Fixed Protection 2016 (FP2016) 

You can apply fro Fixed Protection 2016 from 6 April 2016 if you expect your pension savings to be more than £1 million (including taking into account past benefits already in payment) when you come to take them on or after 6 April 2016.  FP2016 can be used to help reduce or mitigate the lifetime allowance charge. 

Further information on HMRC Lifetime Allowance Protections can be found on the LG Factsheet or the HMRC website https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

What should I do?

If you are unsure whether to apply for Protection, we can provide further information about your pension benefits within the Local Government Pension Scheme but this is an extremely complex area and the Pension Fund will not be able to give you advice about whether or not Protection is right for you.

Your decision will be dependent on your personal circumstances and it is recommended that you speak to a final advisor.