Help with annual allowance - civil service pension

Nikster

Hi everyone,

I hope you can help me to work out whether I have breached my annual allowance in 2016/17 and 2017/18. I think the carry forward amounts in the previous years would cover the excess but I'm not sure. I have 12 years banked in the Classic scheme and have been in Alpha since. My salary went up during a period on temporary promotion in 2016/17 and 2017/18 before dropping back down. The Pension Input amounts are as follows:

2013/14: £8,446
2014/15: 22,732
2015/16: pre-alignment Classic £13,366, Alpha £6,200 Total: £19,566 ; post-alignment: Classic £18,882, Alpha £16,720 Total: £35,602
2016/17: Classic £32,792, Alpha £27,217 Total: £60,009
2017/18: Classic £54,628, Alpha £35,650 Total: £90,278
2018/19: Classic £0, Alpha £32,100 Total: £32,100

Please let me know if you need other figures. Any help would be appreciated.

Thanks



 

hugheskevi

You can use the HMRC Annual Allowance calculator to check.

Putting the numbers in, I think the position is as follows.

Note, this assumes you do not have a Threshold Income in excess of £110,000 (Threshold Income is usually taxable income), nor have made any pension contributions to any other pension schemes.

So it looks like you have exceeded the AA by £28,612 in 2017/18 and have a tax charge to pay in that year. Assuming you are a higher rate taxpayer that would be a charge of £11,444.80. This will need to be declared on a revised 2017/18 Self-Assessment return (if you did not complete Self-Assessment that year you will need to register). Note HMRC may levy penalties and interest for late payment, but in my experience they are small (eg around £100) for late Annual Allowance declarations. You complete boxes 10, 11 and 12 of the 'Additional Information' section of the Self-Assessment return to declare the breach.

You can pay the charge using voluntary Scheme Pays (even though it is a past year) which is where your pension is reduced in return for the scheme paying the charge - details of how to do this are at this page.

Nikster

Thanks for doing the calculations. Doesn’t the fact that I had unused allowance in the previous three years cover the amount due in 2017/18 under the carry forward rule?

mark55man

I think you might be trying to double count, plus being confused by the split in tax year 2015/16 when it all changed - as I understand it (theoretically as I have never had to do it, but came close hence the research). 
In the year when you pension saving exceed £40000 you use all your current year allowance, and then use residuals from 3 years previously, then 2 then 1 in that order.  So I've tried to do the maths (it's raining) and couldn't quite make it work but broadly you had £200K pension input in 4 years so I'm no surprised there is an element hanging over.  You may have fallen victim to the complication of  a significant downward change in allowance in July 2015 which meant the year was taken in two bites.  (https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/annual-allowance/#:~:text=Individuals%20have%20an%20annual%20allowance,year)%20is%20added%20to%20this.) 

I made the taxable sum just <£28K but I am sure the calculator posted previously is correct

hugheskevi

Nikster said:

Thanks for doing the calculations. Doesn’t the fact that I had unused allowance in the previous three years cover the amount due in 2017/18 under the carry forward rule?

The HMRC calculator takes account of carry-forward, you do not have enough carry-forward to fully mitigate the breach.

For 2015/16, as the pre-alignment input was below £40,000 you can effectively just use the post alignment figure as the pension input for 2015/16 (with an allowance of £40K and carry-forward from previous 3 years as normal) and ignore the pre-alignment figures.

Nikster

Thank you so much for explaining this. I have to admit that I’m shocked to hear that the taxable sum in so high. I’ve had a look at the scheme pays guidance. I think I would qualify for mandatory scheme pays. Would you have any idea of what this amount would equate to in terms of a reduction in benefits?

Also I’m surprised that I haven’t been contacted to say that I breached the allowance in 2017/18. Do you know why this might be the case?

Finally, it seems to me that I will always breach the allowance if i get promoted and my pay increases. Is there anything I can do to mitigate this in the future?

Thank you again.

hugheskevi

Nikster said:

 I think I would qualify for mandatory scheme pays. Would you have any idea of what this amount would equate to in terms of a reduction in benefits?

You had to apply for mandatory Scheme Pays by 31st July 2019 to be eligible, hence why you will need to use voluntary Scheme Pays (or pay the charge directly to HMRC).

Nikster said:

Also I’m surprised that I haven’t been contacted to say that I breached the allowance in 2017/18. Do you know why this might be the case?

You should have received Pension Saving Statements from MyCSP for 2016/17 and 2017/18. These should have been sent to you by 6th October 2017 and 6th October 2018. You may wish to check that your employer and MyCSP hold your correct address if you did not receive one, and then ask MyCSP to confirm they were issued.

Nikster said:

Finally, it seems to me that I will always breach the allowance if i get promoted and my pay increases. Is there anything I can do to mitigate this in the future?

Not much, usually although unwelcome the tax charge falls into the category of good problems to have. However, for temporary promotion where you expect to return to a lower salary for more than 3 years (classic final salary takes your highest salary over last 3 years) you could consider whether switching to Partnership would be better overall than paying a charge for a benefit you may not receive due to returning to a lower salary.

You might also be able to manipulate the exact date of a salary increase to avoid it all falling in one year.

NedS

Nikster said:

Finally, it seems to me that I will always breach the allowance if i get promoted and my pay increases. Is there anything I can do to mitigate this in the future?

Alpha pension accrues 2.32% of your salary per year and the contribution towards your annual allowance is 16 times this, so working backwards, £40,000 /16 *100 / 2.32 = £107,758 which is how much you would have to earn whilst in alpha for you to breach the annual allowance. Nice problem to have I guess

Nikster

NedS said:

Nikster said:

Finally, it seems to me that I will always breach the allowance if i get promoted and my pay increases. Is there anything I can do to mitigate this in the future?

Alpha pension accrues 2.32% of your salary per year and the contribution towards your annual allowance is 16 times this, so working backwards, £40,000 /16 *100 / 2.32 = £107,758 which is how much you would have to earn whilst in alpha for you to breach the annual allowance. Nice problem to have I guess

Thanks but I will also have the 12 years in classic linked to my final salary which have an impact on whether I breach the allowance.

Do you happen to know what a tax charge on £28k using voluntary scheme pays would equate to in terms of loss of pension benefits?

hugheskevi

Nikster said:

Do you happen to know what a tax charge on £28k using voluntary scheme pays would equate to in terms of loss of pension benefits?

It depends on your age. If you are around about 40 years of age, a tax charge of £11,445 would result in an alpha scheme pays debit (ie reduction of pension) of something like £1,100 of annual pension, whereas if you are 50 it would be more like £800.

You should also be aware of the McCloud judgment - this will have implications regarding your charge, but as yet it is not clear what those implications are.