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For members of the Local Government Pension Scheme in Scotland

Tax

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.

Overview

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.

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 £7,075 of extra yearly pension.

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The 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 is currently £40,000.


Your annual allowance 03:22

Tax rules limit how much pension you can build up each year without having to pay a tax charge. This video explains how the annual allowance works.

Download transcript

Visit the Videos page to watch more of our ‘Pensions made simple’ videos.

Who is affected by the annual allowance?

Most people aren’t affected by the annual allowance because their pension savings don’t increase by more than £40,000 in a year. You are most likely to be affected if one or more of these statements applies to you:

  • You have membership in the final salary section and you receive a significant pay increase. Membership built up before 1 April 2015 is final salary membership. You could also have membership in the final salary section that you transferred from another public service pension scheme.
  • You combine a previous LGPS pension benefit that was built up in the final salary section of the LGPS and your salary is higher than it was when you left the Scheme.
  • You transfer pension rights that include final salary benefits into the LGPS from another public service pension scheme and your current salary is higher than your salary was when you left the other pension scheme.
  • You pay a high level of additional contributions.
  • You are a high earner.
  • You have accessed flexible benefits since April 2015.

How is the annual allowance worked out?

The increase in the value of your LGPS benefits in a year is calculated by:

  • working out the value of your benefits before the start of the ‘pension input period’
  • increasing that amount by inflation
  • comparing it with the value of your benefits at the end of the ‘pension input period’
  • adding any Additional Voluntary Contributions (AVCs) that you or your employer has paid during the year.

The pension input period is the same as the tax year – 6 April to 5 April.

The value of your LGPS benefits is:

  • your annual pension multiplied by 16 plus
  • any lump sum you are automatically entitled to. You will have an automatic lump sum if you joined the LGPS before 1 April 2009.

If the value of your pension benefits at the end of the year less their value before the start of the year is more than the annual allowance, you may have to pay a tax charge.

The annual allowance applies to all pension schemes, not just the LGPS. If you pay into more than one pension scheme in a year, you will need to find out the total increase in pension savings across all schemes to find out if you have exceeded the annual allowance.

You can use the Annual allowance quick check tool to check if your LGPS pension savings are likely to exceed the annual allowance.

Carry forward

The carry forward rule allows you to carry forward unused annual allowance from the three previous years. This means that you may not have to pay an annual allowance tax charge, even if the value of your pension savings increases by more than the annual allowance in a year. To carry forward unused annual allowance from an earlier year, you must have been a member of a tax-registered pension scheme in that year.

The tapered annual allowance for high earners

The annual allowance is reduced or ‘tapered’ for higher earners. The annual allowance will be reduced if your ‘Threshold income’ and ‘Adjusted income’ exceed the limits in a year. For every £2 that your Adjusted Income exceeds the limit, your annual allowance is reduced by £1. Your annual allowance cannot be reduced below the minimum. These limits changed from April 2020. The table below shows the limits that apply.

TermDefinitionLimit 2016/17 to 2019/20 Limit 2020/21 onwards
Threshold incomeBroadly, your taxable income after your pension contributions have been deducted (including AVCs deducted under the net pay arrangement£110,000£200,000
Adjusted incomeBroadly, your threshold income plus pension savings built up in the tax year£150,000£240,000
Minimum annual allowanceThe minimum annual allowance that can apply£10,000£4,000
Tapered annual allowance limits

Flexible benefit access and the annual allowance

If you have benefits in a money purchase (defined contribution) pension arrangement which you have flexibly accessed since 6 April 2015, then the money purchase annual allowance rules may apply. This includes where you withdraw a taxable lump sum from your AVCs. This will only be the case if your total contributions to a money purchase arrangement (such as AVCs) exceed the money purchase annual allowance in a year.

If your contributions exceed the money purchase annual allowance, your pension savings in the LGPS will be measured against the alternative annual allowance.

Tax yearMoney purchase annual allowance (MPAA)Alternative annual allowance if MPAA exceeded
2016/17£10,000£30,000
2017/18 onwards£4,000£36,000
The money purchase annual allowance

If you access flexible benefits, your pension scheme must give you a flexible access statement. If you accessed flexible benefits in a different pension scheme, you should give your LGPS pension fund a copy of this statement.

Exceeding the annual allowance

Your pension fund must tell you if your pensions savings in the LGPS exceed the annual allowance in a tax year. They must inform you within six months of the end of the tax year – by 6 October. Your pension fund is not required to tell you if you have exceeded the tapered annual allowance.

If you exceed the annual allowance in a year, you must report this to HMRC in your self-assessment tax return.

If you have an annual allowance tax charge that is more than £2,000, 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. This is known as ‘scheme pays’. If you are retiring, you must elect for scheme pays before you take your pension. Contact your pension fund to find out more about scheme pays and the time limits that apply.

If you wish to slow down your pension build-up, you may wish to consider joining the 50/50 section. In the 50/50 section you pay half your normal contributions and build up pension at half the normal rate. You retain full life cover and ill health cover. You can find out more about 50/50 in the Paying less section.

Before taking any action to reduce your tax liabilities you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser.

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Annual allowance examples

Annual allowance example 1 – Sanjay

This example shows Sanjay’s annual allowance position for the 2019/2020 year. This example demonstrates the lower annual allowance tapering limits that were in force before the 2020/21 year.

Sanjay’s financial informationAmount
Gross salary 2019/20£130,000
Less employee pension contributions (10.2%)£13,260
Plus taxable income from property£30,000
Threshold income 2019/20£146,740
Plus pension savings in the year£42,449
Adjusted income 2019/20£189,189
Example 1 – Basic information

Sanjay’s Threshold income is more than £110,000 and his Adjusted income is more than £150,000. His annual allowance is tapered for the 2019/20 year

Sanjay’s financial informationAmount
Tapered annual allowance£20,406*
In excess of annual allowance£22,043 (£42,449 – £20,406)
Annual allowance tax charge at marginal rate£8,817.20 (40% rate assumed)
Example 1 – Tapered annual allowance position

* Taper = £189,189 – £150,000 = £39,189 ÷ 2 = £19,594 (rounded down)

Standard annual allowance £40,000 – £19,594 = tapered annual allowance £20,406


Annual allowance example 2 – Cerys

Cerys is a higher earner who exceeds the standard annual allowance in the 2020/21 year.

Cerys’s financial informationAmount
Gross salary 2020/21£220,000
Less employee pension contributions (10.9%)£23,980
Threshold income 2020/21£196,020
Example 2 – Basic information

Cerys’s Threshold income is less than £200,000. Her annual allowance will not be tapered in 2020/21. Cerys’s pension savings will be measured against the standard annual allowance of £40,000.

Cerys’s financial informationAmount
Pension savings in 2020/21£71,837
Standard annual allowance£40,000
Pension savings in excess of annual allowance£31,837
Annual allowance tax charge at marginal rate£14,327 (45% rate assumed)
Example 2 – Annual allowance position

Annual allowance example 3 – Huang

In this example, Huang exceeds the increased tapered annual allowance limits that apply from the 2020/21 year.

Huang’s financial informationAmount
Gross salary 2020/21£210,000
Less employee pension contributions (10.9%)£22,890
Plus taxable income from property£30,000
Threshold income 2020/21£217,110
Plus pension savings in the year£68,571
Adjusted income 2020/21£285,681
Example 3 – Basic information

Huang’s Threshold income is more than £200,000 and her Adjusted income is more than £240,000. Her annual allowance will be tapered for the 2020/21 year.

Huang’s financial informationAmount
Tapered annual allowance£17,160*
In excess of annual allowance£51,411
AA tax charge at marginal rate£23,134 (45% rate assumed)
Example 3 – Tapered annual allowance position

* Taper = £285,681 – £240,000 = £45,681 ÷ 2 = £22,840 (rounded down)

Standard annual allowance £40,000 – £22,840 = £17,160.


Annual allowance examples – assumptions

We have made no allowance for any carry forward in these examples. In working out the pension savings in the year we have assumed:

  • inflation adjustment of zero
  • the members have no final salary benefits in the LGPS, and
  • the members are not paying any additional contributions.
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The lifetime allowance

The lifetime allowance is the total value of all pension benefits you can have without having to pay extra tax. If the value of your pension benefits when you take them is more than the lifetime allowance, or more than any protections you may have, you will have to pay tax on the excess benefits. This does not include any state pension, state pension credit or any partner’s or dependant’s pension you are entitled to.

The lifetime allowance covers any pension benefits you have in all tax-registered pension arrangements – not just the LGPS.


Your lifetime allowance 02:57

Tax rules limit how much pension you can build up over your lifetime without having to pay a tax charge. This video explains how the lifetime allowance works.

Download transcript

Visit the Videos page to watch more of our ‘Pensions made simple videos.

The lifetime allowance has changed a number of times since 2011. The UK Government has announced that it will stay at its current level until the 2025/26 year.

Tax yearLifetime allowance
2011/12£1.8 million
2012/13£1.5 million
2013/14£1.5 million
2014/15£1.25 million
2015/16£1.25 million
2016/17£1 million
2017/18£1 million
2018/19£1.03 million
2019/20£1,055,000
2020/21 to 2025/26£1,073,100
The lifetime allowance since 2011

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. If you have a pension that was first paid before 6 April 2006, this will also be treated as using up part of your lifetime allowance. For these pensions, the capital value is the current annual pension multiplied by 25. Any lump sum you received is ignored.

You can use the Lifetime allowance quick check tool to estimate how much of the standard lifetime allowance your LGPS pension savings will use.

When you take your benefits, if the capital value of those benefits is more than your available lifetime allowance, you will have to pay tax on the excess. If your excess benefits are paid as a pension, the tax charge will be 25% of the excess. The ongoing pension payments will also be subject to income tax. If you take the excess benefits as a lump sum, they will be taxed once at 55%.

You can choose to pay the tax immediately by a reduction to your lump sum, pay the tax directly to HMRC yourself or you can 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.

Changes to the lifetime allowance

The lifetime allowance reduced from £1.25 million to £1 million in 2016. The Government introduced two protections called Fixed Protection 2016 and Individual Protection 2016. These protections are the same in design as Fixed and Individual Protections 2014 which were introduced when the lifetime allowance reduced in 2014.

Individual Protection 2016

You can apply for Individual Protection 2016 if the value of your pension savings on 5 April 2016 was more than £1 million. You can’t apply if you have Primary Protection.

Individual Protection 2016 gives a protected lifetime allowance equal to the value of your pension rights on 5 April 2016, up to a maximum of £1.25 million. You will have to pay tax on any pension savings in excess of your protected lifetime allowance.

Fixed protection 2016

You can apply for Fixed Protection 2016 if you expect your pension savings to be more than £1 million when you take them after 6 April 2016. With Fixed Protection 2016, your lifetime allowance is fixed at £1.25 million.

Fixed Protection 2016 is lost if your benefits increase by more than the cost of living in any tax year. The cost of living increase in 2016/17 was zero. You can only hold Fixed Protection 2016 if your LGPS membership ended before 6 April 2016. If you remained a member after 6 April 2016, you would have lost this protection.

You will also lose Fixed Protection if you:

  • start a new pension arrangement, other than to accept a transfer of existing pension rights
  • pay into a money purchase pension arrangement, other than to a life assurance policy that you started before 6 April 2006
  • transfer your pension, except in limited circumstances.

If you lose Fixed Protection, you must let HMRC know within 90 days of the date you could first reasonably be expected to have known about the loss.

You can’t have Fixed Protection 2016 If you already have Primary or Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014.

Applying for Fixed and Individual Protection 2016

You can protect your pension lifetime allowance by applying to HMRC for Fixed or Individual Protection 2016. There is no deadline for making an application. However, you will need to inform HMRC of the value of your pension savings on 5 April 2016 to apply for Individual Protection 2016. Your pension administrator was only obliged to provide you with this information up to 5 April 2020.

If you successfully apply for protection, the online service will provide you with a reference number that you must keep. You must apply before you take your pension as you will need to give your pension administrator this reference.

Other protections

When the Government introduced the lifetime allowance in 2006, and when it reduced in 2012 and 2014, it introduced protections for members with large pension pots. If you have applied for a previous protection such as Enhanced Protection, Primary Protection, Fixed Protection 2012 or 2014, or Individual Protection 2014, you should have received a certificate to confirm your protection.

You may still be subject to a lifetime allowance charge if your pension exceeds your protected amount or if you lose your protection.

You can find out more about Tax on your private pension contributions, these protections and when you may lose them on the Government website.

Taking a tax-free lump sum

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

  • 25% of the capital value of your LGPS pension
  • 25% of the lifetime allowance
  • 25% of your remaining lifetime allowance if you have already taken payment of pension benefits.

What to do if you think you might be affected

Before taking any action to reduce your pension liabilities, you should always seek independent financial advice from an adviser registered with the Financial Conduct Authority. MoneyHelper can help you choose a financial adviser.

You may also wish to consider:

  • Exchanging annual pension for lump sum at retirement can reduce the capital value of your LGPS benefits
  • If you wish to slow down your pension build-up, joining the 50/50 section of the LGPS allows you to pay half your normal contributions to build up half your normal pension. You would retain full ill health and life cover.

Contact your pension fund if you have any questions about your LGPS membership or benefits.

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Lifetime allowance – examples

Lifetime allowance example 1 – Sarah

Sarah retires on 31 May 2021. she has not taken any pension benefits previously.

Sarah’s financial informationAmount
LGPS annual pension£25,000
LGPS lump sum£45,000
AVC taken as a lump sum£116,375
Capital value of LGPS benefits£661,375*
Example 1 – basic information

* The capital value is (20 × £25,000) + £45,000 + £116,375

The capital value of Sarah’s benefits is less than the lifetime allowance for 2021/22 of £1,073,100.

She has used 61.63% of the available lifetime allowance.


Lifetime allowance example 2 – Patrick

Patrick retires on 31 January 2022. He has not taken any pension benefits previously and he has not applied for any lifetime allowance protection.

Patrick’s financial informationAmount
LGPS annual pension £50,000
LGPS lump sum£120,000
Capital value of benefits (20 × £50,000) + £120,000£1,120,000
Excess over lifetime allowance of £1,073,100£46,900
Tax charge payable on excess£15,477*
Example 2 – Lifetime allowance tax charge

* Patrick opted to be paid the benefits in excess of the lifetime allowance as a lump sum. Tax on the lump sum is charged at 55%.

The tax payable is £46,900 ÷ 20 × 12 × 55% = £15,477.

Patrick has used 100% of the available lifetime allowance.

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