Your quick guide to pension tax

Tax happens – but it’s not always take, take, take. Your pension’s a tax-efficient way of saving for the future and we provide a range of options that could help you manage your tax liability.

Tax relief - what is it and how do you benefit?

This is a pretty good one – it’s like getting free money from the government as a reward for building your pension.

Tax relief

The tax relief you get is based on the rate of income tax you pay – most people pay the basic rate of 20%, so that means every £100 you pay into your pension, you pay £20 less in income tax. If you’re a higher-rate or additional-rate taxpayer, it works the same way, with your tax relief based on the rate you pay.

While you get a tax saving upfront, you will be taxed on the pension you receive once you retire, but, you can take up to 25% of your pension as a tax-free lump sum, and you’ll only pay tax on any monthly retirement (and any other) income that’s above your personal allowance – like you do now with income tax.

Limits to how much pension you can build up and receive

There are various government-set limits on the level of benefits you can build up and how much you can take, before being subject to tax charges.

The Annual Allowance

The government-set limit on the amount of pension benefits you can build up in a single year is £40,000 (for 2019/20).

It’s calculated differently for Defined Benefit arrangements like the Retirement Income Builder, where the increase in the value of the benefits you build up is measured, and Defined Contribution arrangements like the Investment Builder, where it’s determined by the amount you and your employer pay in.

If you go over the Annual Allowance in a single tax year, you’ll receive a tax charge on the amount above the limit. But if you don’t go over the allowance in any of the previous three years, you may be able to carry any unused allowance forward to offset against the current year’s.

The Tapered Annual Allowance

For higher earners, the Tapered Annual Allowance reduces your Annual Allowance based on your income. Check out our Annual Allowance factsheet for more details.

The Money Purchase Annual Allowance

This affects anyone that’s taken cash from their Defined Contribution savings: If you take cash from your Investment Builder pot, you and your employer will only be able to contribute a combined maximum of £4,000 a year (for 2019/20), before you are subject to additional tax. If you took cash from your Investment Builder at the same time as taking benefits from your Retirement Income Builder, this won’t apply to you.

If you have any other Defined Contribution arrangements outside of USS and you take cash payments from them, either as UFPLS or drawdown, the Money Purchase Annual Allowance will also apply – you and your employer will only be able to contribute up to £4,000 to all your money purchase arrangements (not £4,000 to each of them).

If taking cash from a Defined Contribution triggers the Money Purchase Annual Allowance, you will be informed.

The Lifetime Allowance

The Lifetime Allowance is the government-set limit on the amount of pension benefit that you can receive without triggering an extra tax charge. For 2019/20 it’s £1,055,000 and it goes up in line with inflation at the start of each new tax year.

Every time you use your pension benefits to provide an income and/or a lump sum, you’ll use up some of your Lifetime Allowance – we’ll outline the impact of your Lifetime Allowance in the quote we provide, when you’re looking to retire.

The Lifetime Allowance doesn’t apply to your State Pension, but it does apply to all other pension benefits you build up, not just those in USS.

Managing your tax in USS

We have a range of options available to help you manage your pensions tax.

Voluntary Salary Cap

3 March

Deadline for
Voluntary Salary Cap


If you’re close to your Annual Allowance, you can ask us to apply a cap to your pensionable salary for tax purposes.

You can cap your salary to any level at or above the salary threshold (£58,589.70 for 2019/20).

The Voluntary Salary Cap takes effect from 1 April each year – but the deadline for applications is 3 March.

With a Voluntary Salary Cap, you’ll only pay contributions up to the level of the salary you set, unless you choose to pay 2.5% above the cap to keep life and incapacity cover based on your full salary. Use the The Annual Allowance Modeller to see the impact of different Voluntary Salary Cap levels.

You can get the Voluntary Salary Cap form from the pensions contact at your workplace, and you’ll need to speak to your pension or payroll team because they’ll need to make a change to their payroll for you.

Please note: Since the salary threshold is the subject of an employer consultation, which will complete after the Voluntary Salary Cap deadline (3 March), if you apply for a Voluntary Salary Cap based on the current salary threshold, it will be set to the level of the new salary threshold from 1 April automatically.

Enhanced Opt Out

Enhanced Opt Out lets you keep life and ill-health cover without building up any further USS benefits.

It’s most useful if you’re close to or have exceeded your Lifetime Allowance and you want to manage the tax liability of the USS benefits you’ve built up.

With Enhanced Opt Out, you pay 2.5% of your salary into the scheme instead of 9.6%, and your employer pays in 2% instead of 21.1%.

If you choose Enhanced Opt Out you:

  • Must keep it for at least a year.
  • Can only choose it once – if you cancel, we can never reinstate it.
  • Can’t take flexible retirement.
  • Should check whether using Enhanced Opt Out would breach the conditions of any Lifetime Allowance protection you have in place (events such as incapacity retirement whilst an Enhanced Opt Out member may cause you to lose your fixed protection).

Scheme Pays

In most cases, if your pension savings for the tax year exceeded your Annual Allowance limit and if you didn’t have enough unused allowance to carry forward from the previous three tax years, you’d need to pay an Annual Allowance charge.

Scheme Pays allows you to pay this charge from your pension – we pay it on your behalf out of your benefits, so you don’t have to find the cash to cover it there and then.

Use the Scheme Pays modeller to see what works best for you.