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Tax considerations 

Members of pension schemes in the UK enjoy tax relief on both their pension contributions and on any cash lump sum they may choose to withdraw on retirement. Pension income, however, is taxed as earned income under the PAYE system.

Use our cost of contributions calculator to see just how much tax relief you receive.

This preferential tax treatment is the government’s way of incentivising individuals to save towards their retirement. But there are limits to the government’s generosity. There are restrictions on the maximum tax-free benefit you can build up in any single year and the maximum tax-free benefits you can draw at retirement.

July 2015 Budget announcement - please read this summary of the 2015 Budget announcement highlighting changes to the tax allowances that are currently in place. More details to follow from USS. In the meantime please take a look at our interactive tax factsheet to learn more about the tax allowances......

These limits, or allowances, come in three forms:

  • Annual allowance (including the Money Purchase Annual Allowance) – a restriction on the amount of benefits you can build up in a single year and still benefit from tax relief.
  • Lifetime allowance – a restriction on the maximum amount of benefits you can earn up to retirement in a tax-beneficial way.
  • Maximum tax-free cash – a limit to the amount of tax-free cash you can receive at retirement. This is expressed as a percentage of the value of the benefits you have earned with an absolute maximum.

Annual allowance (AA)

This limit is expressed as a capital value. Since the 2014/15 tax year the allowance has been £40,000 a year. It’s the capital amount by which your pension benefits have grown during what’s called a pension input period (PIP). For USS the PIP is 1 April to 31 March each year.

To work out the AA for yourself, for any given year, first you’ll need to work out the value of your pension on the 1 April of that year. Next you’ll need to increase that value by the equivalent rise in the Consumer Price Index (CPI) for the previous year. The next step is to work out the value of your pension on the following 31 March and work out the difference between the two. Multiply this figure by 19 and add to this the gross amount of any contributions you’ve paid into the USS Money Purchase AVC. The figure that you’re left with is what’s called your annual allowance accrual for that particular tax year.

If you find that you’ve exceeded the statutory AA, you may be able to offset your tax liability by utilising any unused allowances from the previous three years.

The table below will give you an indication as to whether or not you might be affected by the AA. Generally speaking, the more service you have and the larger your salary, the more likely it is you’ll exceed the AA.

The green areas indicate that you’re well short of the AA; amber means you’re within 20%; and red means you could be over the AA.

You can get a more accurate estimate by using the annual allowance tool within USS’s benefit modeller.

Money Purchase Annual Allowance (MPAA) - If you were to draw defined contribution benefits from a scheme outside of USS the MPAA will be applied to the amount of money you can then save in to any other defined contribution scheme, including the USS Money Purchase AVC. In other words, only contributions paid in to a defined contribution arrangement up to the MPAA will benefit from tax relief. The MPAA is currently £10,000 a year. For more information please see our interactive tax factsheet.

Lifetime allowance (LTA)

The LTA limits the overall amount of tax-free retirement benefits you can build up. It’s expressed as a capital value. For the 2015/16 tax year the limit is £1.25 million. This reduces to £1.00 million for the 2016/2017 tax year.

In order to exceed the £1.25 million limit, you’d need to have built-up 40 years’ service in USS and be earning around £108,700 a year. Of course, paying additional contributions to the scheme will also increase the amount of the allowance you utilise.

The table below will give you an indication as to whether or not you might be affected by the current LTA.

Using USS’s benefit modeller will give you a more accurate estimate.

Maximum tax-free cash

As well as the limits outlined above, there’s a limit on the amount of tax-free cash you can take on retirement. This is limited to 25% of the value of your total benefits, or 25% of the LTA, whichever is lower.

For full details see our interactive factsheet here.

Managing potential tax charges

USS has introduced some options to help members manage tax charges that might arise as a result of exceeding either the AA or LTA.

However, we should stress that these options might not be the right ones for you; it depends on your particular circumstances. Your net benefits, even after a potential tax charge, may be greater than the net cost of the contribution paid by you. If in doubt, you should seek financial advice.

We’ve produced a factsheet and a video presentation that explain the options in more detail.

If you’ve already reviewed your options and decided on a course of action, you can download the relevant form/s using the links below.

Although we can’t provide you with financial advice, we’re happy to clarify any technical issues/queries. If you’d like help in relation to your tax options, please contact:


Contact details

Enquiry type

Andrew Hale

0151 478 7201

Applications for this financial year

Jeanette Stevens

0151 478 7098

Current pension and annual allowance figures

Sharon Harvey

0151 478 7045

Current pension and annual allowance figures

Steve Golden

0151 478 7016

Technical questions in relation to the tax options rules

Sean Greene

0151 478 7064

Technical questions in relation to the tax options rules

Please remember that USS staff are not authorised to provide financial advice. If you need further help you’ll find details of local financial advisers here, but remember, good advice is seldom free.

If you receive an annual allowance tax charge:

It’s your responsibility to settle this charge with HMRC. However, under certain circumstances you can elect for USS to pay the tax charge on your behalf through a facility known as scheme pays. To avail yourself of scheme pays:

  • Your tax charge must be more than £2,000; and
  • The AA value of your USS benefits must exceed the statutory AA for the tax year in question; and
  • You must have been an active member of the scheme at the time that the tax change arose.

Scheme pays is a mechanism through which a member can require their pension scheme to pay an AA charge on their behalf. In return, the benefits that you’re entitled to receive from the scheme on retirement will be reduced.

To quickly find out the value by which your USS benefits will be reduced, both pension and lump sum, please use our scheme pays modeller. If you’re over 65 years of age or approaching retirement, we’ll prepare an accurate illustration to show the effect of a scheme pays reduction on your benefits. Please contact either:


If your USS benefit entitlement has already ‘crystallised’, i.e. you’re already drawing it, then you won’t be able to use the scheme pays facility.

For more information about the AA and scheme pays, please refer to our published factsheet on the topic.