What are the Tax Implications?

If your pension growth exceeds the Annual Allowance (AA) you will be taxed at your highest (marginal) rate of income tax on the amount over the AA limit.

This is done by adding the excess/extra growth to your taxable income and will be subject to the current income tax thresholds.

So, if your excess pension growth is £20,000 over the AA limit and your income was £30,000, then for Income Tax purposes your ‘income ’in that year will be £50,000 (£20,000 + £30,000) AA charge will be £4,000 (Basic Rate Income Tax of 20% on the £20,000 excess).

You may be able to use carry forward to reduce or eliminate any growth over the threshold and therefore offset any potential charge.

Carry Forward

If your pension growth exceeds the Annual Allowance in any one year, you can ‘go back’ up to three previous tax years, starting with the furthest year, to see if you have any unused allowance from these years.

This means that if your pension growth exceeds the threshold in any one year, you may not have any extra tax to pay, depending upon your ability to carry forward.

If you are a consistently high earner with a long service, with mixed Scheme membership, your pension growth might be consistently high, meaning that you have very little capacity to carry forward.