Tax and pensions

Contributions you pay to the LGPS are tax-free up to certain limits. You may have to pay extra tax if your pension savings are more than those limits.

In this section we look at the HM Revenue and Customs (HMRC) rules about pension savings. 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

before you have to pay extra tax. These are called the annual allowance and the lifetime allowance. This is in addition to any income tax you pay on your pension when it is paid to you. Most people will be able to save as much as they wish because their pension savings are less than the allowances.

The Government has confirmed 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 will be abolished completely from 6 April 2024.

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.

There is a limit on the amount of extra pension you can buy in the LGPS by paying additional pension contributions. The most you can currently buy is £7,579 of extra yearly pension.

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 a tax on the excess. The standard annual allowance increased from £40,000 to £60,000 on 6 April 2023

If you exceed the AA in any year you are responsible for reporting this to HMRC on your self-assessment tax return.

The Scheme will send you a Pension Savings Statement no later than 6 October in the event your benefits accrued within the Hackney Pension Fund exceed your AA limit. However, the Fund will not be able to inform you if you exceed the tapered annual allowance due to the definition of income used by HMRC.

If you have an AA tax charge that is more than £2,000 and your pension savings in the LGPS alone have increased in the year by more than the standard AA you may be able to opt for the LGPS to pay some or all of the tax charge on your behalf. The tax charge would then be recovered from your pension benefits.

If you would like to understand the potential impact of making further contributions to the Scheme, please go to the AA calculator on HMRC website. Use this link https://www.tax.service.gov.uk/paac

You can also go to our member factsheet Tax Controls on Pensions for more information and examples.

The Government has recently 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 will be abolished completely from 6 April 2024.

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 LGPS.

The lifetime allowance has changed a number of times since 2011. 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 will be abolished completely from 6 April 2024.

From 6 April 2020 to 5 April 2024 the Lifetime allowance is £1,073,100

How is the lifetime allowance calculated?

Each time you take payment of a pension benefit, the capital value of the benefits you are taking uses up a percentage of your lifetime allowance. Even if your pensions are small, you should keep a record of every pension you receive. The capital value of pensions that you take after 5 April 2006 is your annual pension multiplied by 20, plus any lump sum you take from the pension scheme.

Before 6 April 2023, when you took your benefits, if the capital value of those benefits was more than your available lifetime allowance, you had to pay tax on the excess. If your excess benefits were paid as a pension, the tax charge was 25% of the excess. The ongoing pension payments were also subject to income tax. If you took the excess benefits as a lump sum, they were taxed once at 55%.

You could choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or ask the scheme to pay the tax for you in return for a permanent reduction to your pension – this is called a lifetime allowance debit. There are protections called primary lifetime allowance protection, enhanced protection, fixed protection, fixed protection 2016 and individual protection 2016.

For more information, see LGPS member: Tax - The lifetime allowance.

Taking a tax-free lump sum

The maximum tax-free lump sum you can have when you take your pension is the lower of:

• 25% of the capital value of your LGPS pension
• 25% of your remaining lifetime allowance.

The standard lifetime allowance in 2023/24 is £1,073,100 and 25% of this amount is £268,275. The Government has announced that no one will pay a lifetime tax charge from 6 April 2023; however, the maximum lump will still be based on 25% of the standard lifetime allowance.

If you have already taken pension benefits from any UK pension scheme, you have used up some of your lifetime allowance. The maximum lump sum you can take is 25% of your remaining lifetime allowance.

If you hold a valid lifetime allowance protection, you may be able to take a lump sum that is larger than £268,275 as long as the lump sum does not exceed 25% of your remaining lifetime allowance.

For more information, see LGPS member: Tax - The lifetime allowance.