Where the Annual Allowance is exceeded, the tax liability will fall on the member.

For tax years up to 2010/11, the Annual Allowance charge was levied at 40% on the excess over and above the Annual Allowance. The amount charged is not income for tax purposes (although it is a charge to income tax). This means the member cannot set any allowances, losses or reliefs against the charge and it will not count as pension income.

From tax year 2011/12, any pension input in excess of the member’s reduced Annual Allowance of £40,000 (£50,000 for tax years 2011/12 to 2013/14) is treated as the top slice of the individual’s income and is taxed accordingly. This means that, effectively, there is no tax relief granted on any such excess input.

Any excess over the Annual Allowance is declared via the individual’s self-assessment tax return. It is not subject to National Insurance contributions.

The self-assessment tax return for an individual asks them to also fill in the relevant boxes of the ‘additional information’ pages if their contributions and pension inputs are more than the Annual Allowance. Notes on the self-assessment return Helpsheet 345 are designed to enable individuals to calculate accurately the total value of their annual pension savings and declare any chargeable excess.

Members of money purchase schemes will use their:
‘pensions savings statement’ (which should normally be received from the scheme administrator if their pension input amount for that pension scheme alone is more than the Annual Allowance, or the scheme administrator believes that they have flexibly accessed a money purchase arrangement and their ‘money purchase input’ amount for that pension scheme alone is more than the money purchase annual allowance), plus
pension input amounts relating to any other pension scheme arrangements they might have,
to quantify their annual pension savings for the tax year.

The self-assessment guidance notes include a simple guide to allow the majority of pension savers in defined benefit schemes to determine whether their savings fall within their allowance.

The reduction of the Annual Allowance to £40,000 from 6 April 2014, will have resulted in many more members of defined benefit schemes becoming subject to an Annual Allowance tax charge and, therefore, having to include the relevant details on their self-assessment tax return.

The introduction of the money purchase Annual Allowance of £10,000 from tax year 2015/16, reduced to £4,000 from 2017/18, has had a similar effect for members with money purchase benefits who have triggered this charge.

If the member does not have the information available to calculate the exact amount of their annual allowance charge, then they can estimate this. For example, the member might not be certain of the exact amount where part of the tax charge may be at 45% as it is uncertain how much of their income would be liable at the additional rate of tax.

When estimates are used, the member should make a note in the 'Any other information' part of their tax return to explain that an estimated figure has been used when calculating the amount of the annual allowance charge and when they expect the final figure to be available. The member will also need to tick the box to show that they have used estimated figures on their tax return.

Once the member has received the details that are needed to work out the annual allowance charge accurately, the member can amend their tax return if this is within 12 months of the statutory filing date. More information can be found in HMRC’s self-assessment manual