2022 Spring Term 1

The know zone

  • The journey to a million
    With UCAS forecasting one million undergraduate applicants by 2025, Kevin Gilmartin examines what this might mean for our school and college leavers over the next few years. More
  • All change for FE?
    Dr Anne Murdoch says government proposals for funding and accountability changes in FE are welcome, but they mustn't fall short of what's required. More
  • Climate change
    Hayley Dunn highlights the key initiatives in the government's new Sustainability and Climate Change Strategy for Education. More
  • Stay out of trouble
    Jacques Szemalikowski urges members to check their pension statements and pay any taxes if they breach their annual pension allowance. More
  • Words of wisdom
    We often try to share a few wise words of wisdom with you - sometimes to help inspire you and at times, just to keep you going. Here, ASCL members share sayings, quotes, and prayers that help them get through life. More
  • May the force be with you
    Deputy Headteacher, Jo Rowley says ASCL Council offers great, nationwide networking opportunities as well as the chance to debate and reflect on the latest issues. Here, she shares her passion for Council and her encounter with Darth Vader. More
  • The gripes of wrath
    Along with death and taxes, the only other certainty in life is that you'll receive annoyingly unreasonable complaints, says Carl Smith, who has put together this guide to help you deal with them (not that he's grumbling about things, you understand). More
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Jacques Szemalikowski urges members to check their pension statements and pay any taxes if they breach their annual pension allowance.

Stay out of trouble

As someone once said, “Make sure you pay your taxes; otherwise you can get in a lot of trouble.” 

When you pay into your pension, be it the Teachers’ Pension Scheme (TPS) or the Local Government Pension Scheme (LGPS), your contribution is deducted before any tax is taken. That’s why it’s deemed to be tax-free and such good value, especially if you pay tax at the higher rate. The tax you end up paying on your salary is on what remains after your pension contribution is taken out. That’s why your annual P60 shows a salary less than you actually earn. Moreover, your employer pays in a contribution on top. 

However, Her Majesty’s Revenue and Customs (HMRC) places a limit on both the tax-free amount by which your pension can grow every tax year (annual allowance), and the tax-free amount you can accrue overall (lifetime allowance). I guess that this is to stop multi-millionaires/billionaires from putting all their money into a pension fund and avoid paying taxes altogether. 

Here, I want to unpick some of the concerns around annual allowance (AA), which is currently set at £40,000 per tax year, and even less if you’re a high earner. This is the tax-free threshold up to which your pension can ‘grow’ annually. Any growth above this is taxed at your higher rate, where you are effectively paying back the tax that you would have paid had you taken the money home. 

Don’t get complacent 

“Well, that won’t affect me,” I hear you say. Please don’t! Else to quote from Scarface, “You may have to pay some back taxes, else do a little time.” Let’s not go there. 

Remember that TPS/LGPS are defined benefit (DB) schemes. A defined benefit pension is a pension that pays you a retirement income based on your salary and the number of years you’ve worked for the employer, rather than the amount of money you’ve contributed to the pension. There is no ‘pot’. 

Consequently, HMRC uses an actuarial formula to calculate what it calls the ‘capitalised value’ of your pension input amount (PIA). This is based on nominal growth in defined benefit rather than any investment. Confusingly, it has nothing to do with what you and your employer pay in. 

Your pension scheme will flag up, usually in the early autumn, if your pension input amount has exceeded your annual allowance in the previous tax year. This is usually via a secure message in your pension inbox, called a Pension Savings Statement (PSS). Many members ignore this. Please don’t! It is important you check this statement annually. A breach of your annual allowance limit can often be triggered by what might seem like quite a modest pay rise. 

The good news is that any amount in your pension input amount below the £40,000 threshold can be carried forward from the previous three years. Your Pension Savings Statement has all the information for the current tax year, plus from the previous three years. If you have enough unspent allowance from the previous three years, you have nothing to declare. Make a note of this and keep it safe. 

If you are liable for tax, you must declare it to HMRC by its deadline. ASCL members are understandably busy, and many do not get round to doing this. However, it could cost you dearly if you fall foul of the rules. Please don’t! 

Members can opt for the scheme to pay the tax, to be recouped over time from their eventual pension. Usefully, this is taken from gross pension and can help bring down your lifetime allowance too and help you avoid a double whammy. 

I appreciate that the world of pensions is drenched in acronyms, your reaction to which is probably, “I’ll look at it later.” Please don’t! As the initial quote stated, you could get “in a lot of trouble”. Wise words from Richard Nixon.

FURTHER INFORMATION

See ASCL’s guidance paper on Understanding the Tax Liability on your Pension www.ascl.org.uk/pensionsandtax

Jacques Szemalikowski
ASCL Conditions of Employment Specialist: Pensions
@ASCL_UK

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