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Tax considerations 

Members of pension schemes in the UK enjoy tax relief on contributions paid in and are also able to draw part of their retirement benefits as a tax-free lump sum on retirement. Pension incomes are however taxed as earned income under the PAYE system.

Use the ‘Cost of contributions’ modeller to see just how much tax relief you receive.

There are however limits to the maximum benefit you can build up in any one year and the maximum benefits you can draw at retirement and still enjoy beneficial tax treatment.

Maximum benefits

USS provides very valuable benefits and is designed to allow you to build up a pension of 1/80th of your pensionable salary for each year plus three times this pension as a tax-free lump sum, as standard.

Many members may not build up enough pension through normal contributions for a variety of reasons; they may have joined the scheme later in their career, had a career break or plan an early retirement.

There are therefore two Additional Voluntary Contribution (AVC) facilities members can use to increase the value of their retirement benefits whilst still receiving tax relief on contributions.

The big attraction of any AVC is that you receive tax relief on your contributions at the highest rate for which you are liable, so it’s a very attractive way to save tax and build up greater retirement benefits, including a tax-free lump sum on retirement.

There are limits though, on the amount of tax free benefits you can build up each year, called the Annual Allowance and on the amount of tax free benefits you can build up overall, called the Lifetime Allowance. There’s also a limit to the maximum amount of tax-free cash you can take at retirement.

Annual Allowance (AA)

This limit is expressed as a capital value, and is currently £40,000 pa. It is the capital amount by which your pension benefits have grown during what’s called a Pension Input Period (PIP), which for USS is 1 April to 31 March each year.

How does it work?

In the Career Revalued Benefits section you need to know how much pension you have earned in the year and simply multiply that by a factor of 19 and then add on the gross amount of any USS Money Purchase AVCs paid from 1 April to 31 March.

So, if your pension was

1 year X 1/80 X £42,000 =  £525.00 pa

the amount of the annual allowance used up would be:-

£525 X 19 = £9,975.00

In the example above the AA is well within the £40,000 a year allowance, therefore you would have considerable scope to pay AVCs if you so wished.

For a member of the Career Revalued Benefits section to exceed the Annual Allowance in any particular year you would need to build up a pension in excess of £40,000/19 = £2,105.00 pa - that’s a year in the scheme at a salary of £168,421.00 pa. You do need to add to this the amount of any AVCs paid.

How does the Revalued benefits AVC affect the Annual Allowance?

If you buy extra benefits by lump sum, the full amount of benefit being purchased will be added to the ‘closing value’ in the AA calculation.

If you decide to buy an additional pension of £1,000pa by monthly contributions you are buying extra benefits gradually over time. So, if you were buying an additional £1,000 pa pension over a period of 10 years, then each year you are buying £100 of pension. This is the amount you include in the closing value in the AA calculation in addition to the standard benefit you have built up.

How does a Money Purchase AVC affect the Annual Allowance?

This is very easy to work out. The gross amount deducted from your pay (before tax relief) is the value you add in to the AA calculation.

So, using the example above, where the AA used up was £9,975 (before any AVCs paid), if you had paid £10,000 over the year into Money Purchase AVCs, then the amount of the AA used up would now be £19,975.00.

So, it’s much easier to work out how much you can pay in to the Money Purchase AVC and stay within the AA limit.

Please note:  

If you receive a transfer-in into USS this is excluded from the calculation of the AA.

If you exceed the AA there is scope to utilise unused allowances from up to the previous three years. If you are still in excess of the limit then anything over the AA is subject to tax at your marginal rate, meaning that the tax charge could be 20%, 40% or perhaps 45%, depending on the level of your taxable pay.

What if I do get a tax charge under the Annual Allowance?

It is your responsibility to settle this charge with HMRC.  However, if your tax charge is:

  • more than £2,000; and
  • the AA value of your USS benefits was over the annual allowance for the tax year in question; and
  • you are currently an active member of the scheme

then you can elect for USS to pay the tax charge on your behalf through Scheme Pays.

Scheme Pays is a mechanism through which a member can require their pension scheme to pay an AA charge on their behalf. The scheme will then reduce the benefits the member is entitled to from the scheme.

To find out how much the reduction to your USS benefits will be (both pension and lump sum) please click here. For more information about the AA and Scheme Pays, please refer to our factsheet. 

If you are age 65 or over, or you are approaching retirement, please ask us directly for details of the Scheme Pays reduction to your benefits.  Please contact either


If your USS benefit entitlement has already ‘crystallised’, i.e. you are already drawing it, then you will not be able to use the Scheme Pays facility.

Lifetime Allowance (LTA)

This limit is to the maximum amount of tax favourable retirement benefits you can build up overall. It is expressed as a capital value,  which is currently £1.25 million. 

To exceed the £1.25 million limit you would need to have 40 years’ service in USS and be earning around £108,000 a year.

For more information, please see the 'Limits to tax relief and tax-free benefits' factsheet'.

Maximum tax-free cash

As well as the limits above there is also a limit on the amount of tax-free cash you can receive, which is 25% of the value of your total benefits at retirement, or 25% of the LTA if this is lower.

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