NHS pensions – What is the Annual Allowance and how does it work?

James Crocker, financial advisor, explains how you may be contributing much more to your NHS pension than you realise and what steps you should take if you are exceeding the Annual Allowance limit.
NHS pensions – What is the Annual Allowance and how does it work?

Author: James Crocker is Director of Bath Wealth Management Ltd.

Every year, Annual Allowance statements are released and bring with them a storm of confusion. Terms like excess, tapered allowance, adjusted income and scheme pays get thrown around, each more complicated than the last.

As the NHS Pension scheme is a Defined Benefit scheme, your total pension income at retirement is calculated from your years of service that are logged in the scheme and your recorded pensionable pay. This means that your pension is not reflected in the amount of employer or employee contributions made. Therefore, unlike a Defined Contribution scheme, you have no control over what you are adding to your pension.

The crux of this is that while you may think your pension contributions are well below the maximum amount allowed, you could end up owing a large tax bill to HMRC without realising it.

So, let’s take a look at what the Annual Allowance is and why it is relevant to your pension.

Calculating NHS pension contributions | Close up on hands of a woman sitting at a desk, pushing keys on a calculator with one hand and writing in a notebook with the other.

This article covers the following:

  • Annual Allowance

  • Tapered Allowance

  • What to do if you have an excess

  • Key takeaways

Annual Allowance

Annual Allowance is the total amount that can be put into your pension each year and receive tax relief. The amount that goes into your pension each year is called the growth figure, which is the figure you receive on your Annual Allowance statement.

The current Annual Allowance limit is £40,000. If your total growth for the year is greater than this limit, then you will get a tax charge on the excess.

Romesh receives a pay rise and as a result, his total pension growth for the tax year is £51,465.
This is £11,465 over the Annual Allowance and so this excess will be taxed.

However, it is not as straightforward as simply comparing your growth figure with the Annual Allowance. Unfortunately, there is a chance that your allowance may not be £40,000 at all, but instead a reduced amount.

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