Pension tax

Head over to the HMRC website where you’ll be able to find more information on how to do this.

Your pension is taxed when in payment just like a regular salary income using your tax code provided by HMRC.

If you think you may be affected by the Annual Allowance (AA), the Lump Sum Allowance (LSA) or the Lump Sum and Death Benefit Allowance (LSDBA) whilst you’re paying in to USS, you could choose one of the following options to help you manage your tax charges:

• Choose Enhanced Opt Out (EOO)
• Use a Voluntary Salary Cap (VSC)

In most cases, you won’t need to pay UK income tax if you’re a resident for tax purposes overseas. But you may need to pay income tax on your pension in the country you’ve moved to. If you live in a country with a double taxation agreement (DTA) with the UK, you’ll pay tax in both countries unless you apply for UK tax relief. You can find a full list of all countries with a DTA by searching ‘double taxation agreements’ on gov.uk.

The nature of your other income will determine whether the additional tax will be collected via a change of your tax code or via submission of a self assessment tax return. Where a change of tax code is required, HMRC will contact us directly with a new tax code.

If you have any questions about your tax code or whether you are required to submit a self assessment tax return, please contact HMRC directly on 0300 200 3300 (or 0044 135 535 9022 from overseas). You’ll need to quote our tax office reference, which is 428/U168, and you’ll need your National Insurance number handy.

The Annual Allowance (AA) is the maximum amount of pension savings you can build up each year before you may incur a tax charge.

The standard AA is £60,000 per tax year. If you’re a high earner, you may have a Tapered Annual Allowance.

Or if you start taking your Investment Builder savings, or any other defined contribution savings, you may be subject to the Money Purchase Annual Allowance (MPAA). This limits how much you can pay into a defined contribution arrangement before you need to pay tax. The limit is £10,000 per year.

You’ll find details of your Annual Allowance (AA) on your Annual Member Statement in My USS. If you’ve gone over the standard AA, you’ll also be able to see how much AA you’ve used over the last three years. You’ll know whether you have any unused AA to carry forward to cover your tax charge.

You can also use our Contributions & Tax Calculator to work out the estimated AA used up by your USS benefits over the 2023/24 tax year.

This is any Annual Allowance (AA) you have left over unused from the previous three tax years that can be used if you’ve gone over the current year’s AA.

We’re unable to calculate any carry forward for you – you can use your Annual Member Statement in My USS to do this.

The benefits you build up in the tax year you left USS will count towards the AA for that year. Any benefits you built up in USS in previous years won’t count.

You’ll need to let HMRC know on your self-assessment tax return. You can find more information about paying your AA tax charge on the HMRC website.

You may be able to use your pension savings to cover the charge with Scheme Pays.

If you have enough unused AA to carry forward from the previous three tax years to cover the charge, you don’t need to complete a self-assessment tax return. Just keep a detailed record in case HMRC ask for more information in the future.

You may also wish to get some tax advice from a tax adviser.

You may be able to manage your Annual Allowance tax charge by using the Voluntary Salary Cap (VSC).

You may also be able to use your pension savings to cover the charge with Scheme Pays.

No, you can’t carry forward any unused MPAA from previous years. Find out more about the MPAA.

A Tapered Annual Allowance is lower than the standard AA and applies to those on a higher income.

Tapering only applies if you have both a threshold income over £200,000 and an adjusted income over £260,000.

This is your taxable income, plus the Annual Allowance amount you have used in the tax year, less your pension contributions. If this is £260,000 or more then you may have a Tapered Annual Allowance.

Head over to the HMRC website where you’ll be able to find more information on how to do this.

This is your taxable income from all sources less your pension contributions. If you've sacrificed any income by taking salary sacrifice on or after 9 July 2015 then add this sacrificed income back on. If you have Threshold Income of £200,000 or more, then you may wish to consider your Adjusted Income, in case you are subject to a Tapered Annual Allowance.

Between 6 April 2020 and 5 April 2023, tapering applied if you had both a threshold income over £200,000 and an adjusted income over £240,000. The tapering worked by reducing your AA by £1 for every £2 of your adjusted income over £240,000 (subject to a minimum AA of £4,000 for adjusted incomes of £312,000 or more).

Prior to 6 April 2020, tapering applied if you had both a threshold income over £110,000 and an adjusted income over £150,000. The tapering worked by reducing your AA by £1 for every £2 of your adjusted income over £150,000 (subject to a minimum AA of £10,000 for adjusted incomes of £210,000 or more).

From 6 April 2024, the government abolished the framework that set out the limit on the amount you can take from your pension benefits and savings before you’re charged tax, known as the Lifetime Allowance.

In its place, the government introduced two new allowances, which took effect from 6 April 2024, they are the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance.

• The Lump Sum Allowance (LSA) places a limit of £268,275 on the total amount of certain tax-free lump sums that you will be able to receive before marginal rate taxation applies. These are known as Relevant Lump Sums and include the following:
  • A Pension Commencement Lump Sum (PCLS);
  • Tax-free element of an Uncrystallised Funds Pension Lump Sum (UFPLS)
  • Tax-free element of any drawdown payments (including Flexi-Access drawdown).

• The Lump Sum and Death Benefit Allowance (LSDBA) places a limit of £1,073,100 on the total amount of tax-free lump sums that can be paid in respect of an individual before marginal rate taxation applies. This includes any Relevant Lump Sums used up by the LSA, in addition to any Relevant Lump Sum death benefits. Relevant Lump Sum death benefits include the following:
  • Serious Ill Health Lump Sums paid before age 75
  • Tax-free Lump Sum Death Benefits paid in the event of your death, prior to age 75.

Each time you take a relevant lump sum from your benefits and savings, or a relevant lump sum death benefit, you’ll use up some of your Lump Sum Allowance and/or Lump Sum and Death Benefit Allowance.

With effect from 6 April 2023 the LTA tax charge was abolished. However, certain LTA protections may still provide you with a higher amount of tax-free cash under the new LSA and LSDBA allowances. There are a few different things you can do in relation to your benefits to reduce the amount by which they exceed the LSA and LSDBA:

• Apply to HMRC for fixed/individual protection 2016 if you are eligible before 5 April 2025.
• Choose Enhanced Opt Out
• Use a Voluntary Salary Cap

We’ll only be able to confirm how much LSA and LSDBA has been used by the benefits you take that were built up with USS – not with any other scheme. You’ll find an estimate of the LSA and LSDBA you’ve used up at USS in your next Annual Member Statement, and we’ll confirm what LSA and LSDBA you will have used when you retire.

If you’re no longer paying in to USS, contact our Member Service Team on 0333 300 1043 and they’ll send you this information.

If you’ve retired on or after 6 April 2024, you’ll find your LSA and LSDBA on your retirement statement. We’ll provide details of the LSA and LSDBA to you each year too. If you retired prior to 6 April 2024, but you still have some savings invested in the Investment Builder you’ll find details of your LSA and LSDBA used by your USS savings in in your next Statutory Money Purchase Illustration.

If you go over the LSA or LSDBA, you may need to pay tax on any lump sum benefits in excess of your available allowances. This will be paid at your marginal rate and we’ll make sure this is deducted at source from any taxable lump sum benefits we pay to you.

In the event of your death, any tax-free lump sum death benefit paid in excess of your remaining LSDBA will be taxed at your beneficiaries marginal rate. Your Legal Personal Representative will be responsible for reporting this information to HMRC, who will then apply the tax and collect this directly from your beneficiaries.

From 6 April 2024, benefits paid to you, or your beneficiaries, as a tax-free lump sum will count towards your LSA/LSDBA.

However, if you have taken benefits from a registered pension arrangement or transferred benefits overseas to a Qualifying Recognised Overseas Pension Scheme prior to 6 April 2024, the value of all these benefits (i.e. pension income and lump sum benefits) will be assessed against the new allowances. If you are age 75 or over before 6 April 2024, this also includes the value of any benefits not taken by your 75th birthday.

By default, we will assume that 25% of the value of the benefits taken, or transferred overseas, before 6 April 2024 were taken as a tax-free lump sum. If you have taken any benefits as a serious ill health lump sum before the age of 75, we will assume that 100% of the value of any benefits taken were paid tax free.

Alternatively, if you have taken less than 25% of your benefits as a tax-free lump sum, you can apply to any of your pension schemes for a transitional tax-free amount certificate.

If you have taken benefits from a pension scheme prior to 6 April 2024, you can apply to any of your registered pension schemes and ask them to provide you with a Transitional tax-free amount certificate (TTFAC).

The TTFAC will detail the amount of LSA and LSDBA that you have remaining at 6 April 2024.

You are eligible to apply for a TTFAC if;

• You have taken pension benefits between 6 April 2006 and 5 April 2024.
• You have had no new pension benefits paid to you on or after 6 April 2024.
• You can provide the scheme you are requesting a TTFAC from with a complete and accurate record of the tax-free amounts you have already taken from all of your registered pension schemes.

You do not have to apply for a TTFAC. However, HMRC recommend if you have taken benefits from a registered pension arrangement prior to 6 April 2024; and taken less than 25% of your benefits as a tax-free cash sum, you should apply for a TTFAC from the first registered pension scheme you plan to take benefits from on or after 6 April 2024. See the HMRC website for more information.

If you wish to apply for a TTFAC from USS, we will require a letter from each of your pension providers confirming:

• The amount of any benefits paid as a tax-free cash sum prior to 6 April 2024. This includes the tax-free element of any Uncrystallised Funds Pension Lump Sums (UFPLS) or drawdown payments.
• The amount of any benefits paid as a Serious Ill Health Lump Sum before age 75.

Complete evidence will need to be provided to USS before a certificate can be issued.

Yes. But you’ll need to make sure your contributions don’t breach the conditions of any tax protections you may have in place.

You can only take full retirement if you are retiring from the role in which you get your USS benefits. However, it is possible to consider and apply for flexible retirement.

Yes, you can cancel your EOO election. However, if you cancel within 12 months of making an election this will invalidate your EOO, you will need to be reinstated as a full member (including back payment of your contributions) with effect from the original election date. You may need to consider the tax implications of this decision and may want to take independent financial advice. Once you’ve cancelled EOO after 12 months, we can’t reinstate it under the current rules. Please contact your employer if you wish to revoke your election. You may want to speak to an independent financial adviser before making a decision in relation to your EOO including in relation to any tax implications.

If you choose EOO and subsequently retire after Normal Pension Age (age 66 from October 2020, age 65 immediately prior to that), late retirement increases will apply from Normal Pension Age until the date you retire. The only exception to this is if you chose EOO before 8 September 2021 and were over Normal Pension Age at that time, in which case late retirement increases will only apply from Normal Pension Age to the date you chose EOO.

For fixed protection 2016, you would have to have stopped building your pension by 5 April 2016. So if you didn’t have EOO on 1 April 2016, it’s now too late to apply for fixed protection 2016.

If you have fixed protection 2016 but you carried on building benefits, it’s your responsibility to inform HMRC that you no longer have the fixed protection.

EOO won’t affect your application for individual protection 2016.

The contribution rate for EOO is 2.5%.

Your benefits will be calculated based on what you’d built up before your EOO started.

In the case of retirement before the Normal Pension Age (NPA), any reductions which apply to your pension will be the same as if you hadn’t used EOO – and you’d carried on building your pension with us.

Yes. We can accept a cancellation of a VSC application before 1 April of the tax year to which it applies. Otherwise, it will remain in force until the end of that tax year. If you want to cancel for subsequent years, you need to tell us by 3 March of that tax year.

It’s a standing agreement that continues each year on a rolling basis. You can cancel it by giving 28 days’ notice – the cancellation will take effect from 31 March. If the salary threshold catches up to your VSC, the salary threshold becomes your new VSC limit.

The lowest you can set the VSC is to the current salary threshold.

You need to decide the overall level of your VSC and tell your employers how you want it applied. For example, if you want to cap your salary at the threshold, and you have two posts at £30,000 per annum, your VSC could apply to one employer (at £10,000) and there’ll be no VSC with your other employer.

You’ll be covered up to the level that you set your VSC at. You can choose to pay 2.5% above the VSC for the full cover of your pensionable earnings.

Visit Enhanced Opt Out for more information.

You may be able to use Scheme Pays to pay your AA tax charge. We’ll take funds from your Investment Builder pot to cover your AA charge. If you haven’t built up enough in your pot, your benefits in the Retirement Income Builder will be reduced to pay the charge. If you don’t want your Retirement Income Builder benefits reduced, you may want to set your VSC higher to ensure you have enough funds in your Investment Builder pot or pay some of the tax charge yourself.

• If you leave a job that had VSC applied to the salary, the VSC would end.
• If you leave a job that didn’t have a VSC applied to the salary, the VSC will still apply until the following 31 March (when your VSC will be cancelled as it’ll be lower than your salary threshold).

You must apply and your employer must submit your completed form before 3 March as your VSC will start from this date.

As a VSC will mean you build up fewer benefits, your adjusted income and the amount of your salary that’s assessed for Annual Allowance purposes will be reduced.

If you want the VSC to continue, you’ll need to let your new employer know, otherwise it’ll stop.

Yes, as long as the charge relates to your USS benefits.

Yes, as long as you let us know before you start taking your pension. This is so we can take off the correct amount before it starts being paid to you.

When you ask for a retirement quote, we’ll let you know what pension savings you've earned in that tax year (and the previous one if you haven’t had that information already). If your Annual Allowance (AA) tax charge is more than £1,000, you can let us know if you want to apply for Scheme Pays – we’ll send the form along with your retirement pack.

Unless you’re retired, you may not know whether you’ll need to pay an AA tax charge until the end of the tax year. You can submit your Scheme Pays notice before you retire based on the information you have at the time.

We’ll pay an estimate tax charge for you. If your charge is over this amount, you’ll need to make up the rest directly with HMRC. And if the charge is lower, you can ask HMRC for a refund.

We can help you with details on your pension with us, but we can’t confirm details about pensions you may have with other schemes or if you have a Tapered Annual Allowance.

To cover the charge, we’ll sell parts of your Investment Builder pot.

As the value of your pot changes every day, we can’t work out exactly how many units we need to sell to cover the charge. So we’ll sell off 10% more than we may need to make sure we have enough if the value of your pot changes. Any amount remaining over the tax charge will be reinvested for you. You’ll be able to see this in My USS.

We’ll only use your Retirement Income Builder benefits to cover the charge if you don’t have enough in your Investment Builder pot. It’ll be taken from your pension and one-off, cash lump sum. If you’re retiring, you can choose either your pension or lump sum to pay it.

We’ll work it out in the same way as if you want to change your pension into extra cash or vice versa. The AA tax charge is then taken from your pension as a regular amount.

You’ll find this information in your Annual Member Statement. If you’ve gone over the standard AA, you’ll also be able to see how much AA you’ve used over the last three years. So you’ll know whether you have any unused AA to carry forward to cover your tax charge.

You can also use our Contributions & Tax Calculator.

Yes, as you’ll already have received tax relief on your contributions. And if you’re over the salary threshold, your employer’s contributions to the Investment Builder will also help towards paying your charge.

You can still pay the charge through your own savings. Or if you’re retiring and taking a one-off, tax-free (subject to HMRC limits) cash lump sum, you could put aside some of the lump sum to pay the charge.

You’ll need to let HMRC know on your self-assessment tax return. You can find more information about paying your AA tax charge on the HMRC website.

You may be able to use your pension savings to cover the charge with Scheme Pays.

If you have enough unused AA to carry forward from the previous three tax years to cover the charge, you don’t need to complete a self-assessment tax return. Just keep a detailed record in case HMRC ask for more information in the future.

You may also wish to get some tax advice from a tax adviser.

Need some advice or guidance

If you want to seek guidance or take financial advice on the options available to you, visit the guidance and financial advice page. You’ll find a range of resources to support your planning and you can also find information on how to access an independent financial adviser.

You can estimate your penalty for late self-assessment tax returns and payments at gov.uk.

Yes, because these benefits are based on your full salary – not just limited to your salary threshold.

If you’ve used some of your funds to pay a Scheme Pays charge in the past, we’ll take an amount off your ill health benefits or the benefits we pay out when you die.

When you are informing the HMRC via your tax return of your intention to use Scheme Pays, you will need to give them the USS tax reference number of 00330004RR.