Sticking with tax, at No. 7 we have Annual Allowance.
Q: I’ve heard mention in the mess, that I will be hit by an Annual Allowance tax charge, is that true and if so what is Annual Allowance?
A: You might have an Annual Allowance (AA) tax charge, depending on the amount of contribution that has been made into your pension during any given financial year. The current limit is £40k of pension input amount (PIA). Promotion is the most likely reason to breach the AA limit, especially when promoting from OF3 to OF4.
If you exceed £40k of PIA you will breach AA and receive notification of a possible tax charge, by way of a letter from Veterans UK. The letters are usually issued in October.
The letters show your previous year’s PIA. If you haven’t used all of your £40k allowance, from each/any of the previous three years, you will be able to offset some or all of the breach.
If you offset the whole breach, you will not have a tax charge to pay, however if there is still a balance to pay, that balance will be charged at 40% or 40% and 45% depending on the amount of the breach. You will have three options for payment.
- For a balance up to £3k you can ask HMRC to alter your tax code.
- You could pay the tax charge.
- You can apply to Veterans UK to use ‘scheme pays’ to pay the debt. The charge will be spread over the life of the pension.
If you are a member of the Forces Pension Society and receive a letter explaining that you may have exceeded your AA limit, please send it to us to check, and we will provide further guidance.