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Tax implications

Contributions paid to increase benefits qualify for full tax relief. They cannot exceed 100% of your taxable pay.

Lifetime Allowance

Since 6 April 2006 HM Revenue and Customs (HMRC) has set a Lifetime Allowance limit. This is on tax free pension savings in all registered pension schemes.

The limit mainly affects high earners. For most people, it results in more tax relief to increase retirement benefits.

The Lifetime Allowance applies to all your pension savings, including those through extra contributions.

Tax free lump sums

HMRC will not allow you to withdraw a tax free lump sum and receive further tax relief by reinvesting it into a registered pension.

This is known as ‘recycling lump sums’ and could apply if the money is re-invested as a lump sum or in monthly payments.

This rule might affect you if you retire within two years of applying to buy extra benefits.

If you think this could affect you, discuss it with a financial adviser before proceeding.

Annual Allowance

The Annual Allowance is currently £40,000.

This can reduce to £30,000 if you both:

  • access the new pension flexibilities on or after 6 April 2015
  • contribute £10,000 or more to a defined contribution scheme

This includes the NHS Money Purchase AVC Scheme.

The Annual Allowance is the maximum amount of tax free growth your pension savings can grow by in a tax year. This doesn’t include any State Pension.

Growth in the NHS Pension Scheme includes any Additional Pension or Added Years bought or being bought during that tax year.

If growth in all of your pension arrangements exceeds the Annual Allowance, you may incur a charge.