The Annual Allowance charge is calculated on the excess of contributions over the ‘pension input amount’ during the ‘pension input period’. From 6 April 2016 pension input periods are aligned with tax years.
The pension input amount is the combined contributions to all of the individual’s registered pension schemes, made by the individual, their employer or any other person on behalf of the individual.
For money purchase, defined contribution arrangements, the pension input is the number of actual contributions paid. For tax relievable contributions it is the ‘grossed up’ amount that is added in calculating the pension input amount, even where the individual did not qualify for the relief, for example, they had insufficient Net Relevant Earnings. Employer contributions are always gross.
Defined benefit arrangements increases in value during the pension input period are included in the total pension input amount, after adjusting for debits or credits to the arrangement for the year.
The Annual Allowance charge is applied to the excess contributions over the individual’s Annual Allowance for the tax year at their marginal income tax rate (i.e. 20%/40%/45%).