The Annual Allowance, set by HM Revenue and Customs (HMRC), is the maximum amount of pension savings you can receive tax relief on each year. HMRC reduced the Annual Allowance from £255,000 to £50,000 from 6 April 2011, with the result that the total tax-free growth in the value of your NHS benefits and other pension arrangements you may have is capped at £50,000.
If the growth in your pension savings is more than the Annual Allowance then a tax charge may be payable on the amount over £50,000. This is the Annual Allowance charge.
The Annual Allowance charge is worked out by calculating the difference between the value of your NHS benefits at the start of the pension input period (the opening value) compared with the value of your NHS benefits at the end of the pension input period (the closing value).
To find the opening value we calculate your NHS benefits to the day before the beginning of the pension input period. Your pension is multiplied by a factor of 16, set by HMRC, and if you are a member of the 1995 section this is added to your retirement lump sum. We then revalue this amount by the Consumer Price Index (CPI) for the September prior to the relevant tax year.
To find the closing value we calculate your NHS benefits to the last day of the pension input period. Your pension is multiplied by 16 and if you are a member of the 1995 section this is added to your retirement lump sum.
If you are a 2008 section member we only have to calculate your pension, for both the opening and closing values, even if you made a choice to move to the 2008 section. The growth in your NHS benefits is: Closing value – Opening value
For further information a fact sheet is available on the NHS pension website. http://www.nhsbsa.nhs.uk/Pensions.