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Technical: Calculating the annual allowance

25 February 2019

The Prudential offers a free-to-use annual allowance calculator on its website. In this article the Prudential Technical Team explain how to use Prudential’s calculator and what information is needed to carry out annual allowance calculations.

Key points

  • The annual allowance limit applies to the total monetary value of all defined contribution amounts paid by or on behalf of an individual (includes 3rd party and employer contributions) plus the pension input amounts for any defined benefit schemes.
  • It is possible for a member to have available annual allowance but insufficient relevant earnings to make tax relievable pension contributions of the amount required to use all their annual allowance in the current tax year.
  • Carry forward is only used where pension input amounts exceed the standard AA or individual’s tapered AA limits for the relevant year.
  • Pension input periods prior to 6 April 2016 did not have to be aligned with the tax year and did not change retrospectively.
  • The tapered annual allowance was introduced from 6 April 2016 and, for high income clients, this must be calculated each year to work out the available annual allowance.
  • Where flexible access has triggered the Money Purchase Annual Allowance (MPAA), you cannot use carry forward to increase the post-trigger MPAA limit. Our calculator does not have MPAA functionality.

Article published by Prudential January 2019.

Our annual allowance calculator When choosing your input for ‘What tax year did the individual first join a pension?’ you need to understand why we ask this question. We are looking to uncover all unused annual allowances (AA) that can be carried forward to the current tax year. This is relevant where pension input amounts (PIAs) for the current tax year will exceed the standard AA, or member’s individual tapered AA if applies. If this is not the case, then you do not need PIAs any further back than the current tax year and you would only need to use the calculator if the taper applied.

If you are looking to maximise carry forward, you would go back three years (but not beyond the date of first joining a pension scheme) before the current tax year and if there is an AA excess in any of those years, three years before that AA excess year, which may mean going right back to 2008/09, to uncover unused AA for carry forward.

Let’s say your client joined a pension scheme in 2008/09 but their first and only AA excess was in tax year 2016/17. You would select a start date of 2013/14 and key PIAs for this year up to date as the excess in 2016/17 could have used available AA from 2013/14, 2014/15 and 2015/16 as required. If there is any unused AA remaining from 2015/16, this can be used until the end of tax year 2018/19.

Next you are asked for ‘Total inputs for PIPs per tax year’. You need to know the pension input amount (PIA) for the pension input period (PIP) ending in the relevant tax year. Before we talk about PIAs, let’s take a look at pension contributions and the tax relief methods that are used.

Tax relief methods

There are various methods of paying pension contributions to a pension scheme. Each scheme will operate using a specific basis, the member can’t choose which option applies.

Net Pay contributions

This method is used by most occupational, employer-sponsored pension schemes. The contribution is deducted from salary before tax is calculated and the gross amount is paid into the pension scheme. For example, if the client wants to pay £100 per month this amount is deducted from their salary before tax is calculated and paid into the pension. If the client pays 12 monthly contributions of £100 in the current tax year the PIA for this contribution would be £1,200.

Relief at Source (RAS) contributions

This applies to personal and third-party contributions on behalf of the member. The contribution is paid net of basic rate tax relief to the scheme and the scheme claims basic rate relief from HMRC, which is then paid directly into the pension. For example, if the client wants to pay £100 gross per month into a personal pension plan the provider will collect £80 per month from their bank account then claim £20 tax relief from HMRC. The gross contribution is £100 per month and 12 contributions in the current tax year would equate to a PIA of £1,200.

Employer contributions

Contributions are paid gross. The PIA is the amount of the contribution.

Salary Sacrifice

This is an agreement between the client and employer. The amount sacrificed will become a gross employer contribution. Therefore, the PIA will be accounted for as part of the employer contribution. However, you will need to find out if the employer is also passing on their National Insurance Contribution savings as a result of the reduced salary (it could be none, some or all).

Assessment – claim to HMRC