• ‘Net income’ is total income subject to income tax, less any losses (mainly concerned with deductions for trade and property losses) less the individual’s personal allowance.
• The appropriate rate is 20% to so much of the chargeable amount as, when added to net income, does not exceed the basic rate limit. 40% on the amount which exceeds the basic rate limit but does not exceed the higher rate limit, and 50% on any part of the excess which exceeds the higher rate limit.

The following examples use the 2011/12 tax bands.

Adrian’s total pension input exceeds his available annual allowance by £10,000. His total taxable income is £60,000. Adrian’s annual allowance tax charge is:

The excess pension input falls in the higher rate band, so the annual allowance charge will be £4,000.

Emma’s total pension input exceeds their available annual allowance by £10,000. Her total taxable income is £145,000. Emma’s annual allowance tax charge is:

Half of the excess pension input falls in the higher rate band, and half above it. The annual allowance charge will be £4,500.

Where a member has an annual allowance charge they can give their scheme administrators notice that they wish to pay for the charge out of their pension funds. The scheme administrators must then account for charge direct with HMRC. This option is conditional on the member’s annual allowance charge liability for the tax year exceeding £2,000 and the total amount of their pension saving in the pension scheme for the same tax year has exceeded the annual allowance.

If the member does not meet the conditions above they can still ask the scheme administrator to account for the charge out of scheme funds, but the scheme administrator does not have to carry out the request if they do not wish to.