The Annual Allowance (AA) is a limit on the total benefits that can be built up in a defined benefit pension scheme and the contributions that can be paid to a defined contribution pension scheme per tax year. From 6 April 2023 the standard AA increased from £40,000 to £60,000. Any pension savings above the AA are subject to additional tax charges.

The money purchase annual allowance

This is relevant if you have flexibly accessed benefits from a Defined Contribution (DC) pension but continue to work and save into a different pension. If so, the maximum amount you can contribute to DC arrangements before having to pay tax is currently set at £10,000 (2023/2024 tax year). If you save over this amount, you will pay tax on any excess.

The tapered Annual Allowance

For members who have a total taxable income of more than £260,000, the AA will reduce by £1 for every additional £2 of taxable income above £260,000. The maximum reduction will be £50,000, so anyone with an income of £360,000 or more will have an AA of £10,000.

This particular tax limit is complex, so you might want to seek financial advice if you are affected.

Scheme pays

If you are subject to an AA tax charge, you can either pay this yourself directly to HMRC using the self-assessment system or in certain circumstances, you can ask your pension scheme to pay the charge on your behalf. This is known as ‘Scheme pays’ and if you use this facility your NGE Group pension or money purchase AVCs will be reduced accordingly.

Scheme pays can generally only be used when there is an AA tax charge payable from the NGE Group of at least £2,000. If you choose to use Scheme pays, your decision cannot be revoked or withdrawn at a later date, although it may be amended if the amount of your AA tax charge changes.

You can find out more information from HMRC (you will be directed to an external site).

Where can I get more information?

If you think that you may be affected by the AA, please contact Railpen for more information.

If you have been issued a Pension Savings Statement this year, the slides to Railpen’s webinars on the AA, which were held during November 2023, are available to view here. An updated FAQ v2 featuring answers to the questions collated from both webinar sessions is available here.


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