The Annual Allowance and your armed forces pension
The Annual Allowance is the cap on how much your pension can grow each year before a tax charge applies, and it catches more armed forces members than you might expect, usually after a promotion or a sharp pay rise. It does not work on what you pay in, because the AFPS is a defined-benefit scheme; it works on how much the value of your pension has grown. This guide explains the pension input amount, the charge, the high-earner taper, and how the McCloud remedy can move your position for the 2015 to 2022 years. It is general information, not tax advice.
Key takeaways
- The Annual Allowance caps tax-advantaged pension growth in a tax year; the standard allowance is £60,000.
- For AFPS it is measured by the pension input amount, the growth in the value of your benefits, not your contributions.
- A big pay rise or promotion can spike the growth and trigger an Annual Allowance charge.
- Carry-forward of unused allowance from the previous three years often soaks up a one-off spike.
- High earners face a tapered allowance, reducing as low as £10,000, and Scheme Pays can settle a charge from the pension.
- The McCloud remedy recalculates 2015 to 2022, which can create or remove a charge for those years.
What the Annual Allowance is
The Annual Allowance is a limit, set by HMRC, on how much your pension savings can grow in a tax year while still getting tax relief. The standard allowance is £60,000. Grow by more than that across all your pensions and the excess can face an Annual Allowance charge at your marginal rate of income tax.
It is easy to assume this only affects people putting huge sums into a pension, but in a defined-benefit scheme like the AFPS it is the growth in the value of your promised pension that counts, not any contribution. That is why members are often caught by surprise.
The pension input amount
For a defined-benefit scheme, growth is measured by the pension input amount. In simple terms, the increase in your annual pension over the year is multiplied by a set factor, broadly sixteen, with any increase in an automatic lump sum added, and the opening figure is adjusted for inflation. The result is the deemed value of a year's growth.
The practical consequence is that a promotion or a large pay rise, which lifts a final-salary pension or adds a big slice to a career-average pot, can produce a pension input amount well above what a steady year would, sometimes above the allowance on its own. A flat pay year, by contrast, usually produces modest growth comfortably within the limit.
The charge, carry-forward and Scheme Pays
If your pension input amount exceeds the allowance, you do not automatically pay a charge, because you can use carry-forward: any unused Annual Allowance from the previous three tax years is added to this year's, which often absorbs a one-off spike from a promotion entirely. Your scheme will send a Pension Savings Statement if your growth exceeds the standard allowance, so you know where you stand.
If a charge is still due after carry-forward, you can usually pay it yourself or ask the scheme to pay it for you through Scheme Pays, where the charge is met from your pension in exchange for a small permanent reduction. That avoids a large bill in one go, but it does reduce your benefits, so it is a genuine decision rather than a formality.
The taper and the McCloud recalculation
Higher earners face a tapered Annual Allowance. Broadly, once your income passes the threshold and adjusted income limits, the allowance falls by £1 for every £2 of income above the adjusted limit, down to a floor of £10,000. If you are a senior officer or have significant income outside the forces, the taper can sharply cut the room you have before a charge applies.
The McCloud remedy adds a further wrinkle. Because the remedy recalculates your 2015 to 2022 service under your legacy scheme or AFPS 15, your pension input amounts for those years can change, creating a charge that was not there before or removing one you already paid. The remedy includes a process to put this right, but it is exactly the kind of complexity where regulated tax advice earns its keep. The binding figures come from HMRC and Veterans UK, not from this site.
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Frequently asked questions
James Hartley
James Hartley spent 22 years in the British Army, including unit personnel administration and pensions and records duties, and now writes the scheme guides and scenario pages on this site. He is not a regulated financial adviser, so the content is general information rather than personal advice.
Sources: gov.uk · GAD factors · Veterans UK · Forces Pension Society · MoneyHelper.