Tax and your pension

Apr 20, 2022
Many people find pension tax complex. So here's a simple guide to the basics for this tax year.

The UK tax year always follows the same schedule, starting on 6 April and ending on 5 April the following year. So the start of the 2022/2023 tax year is an excellent time to get to grips with tax and to find out how it can affect your retirement savings.

Tax relief

One of the many advantages of using a pension to save for retirement is tax relief. When you pay into your Railways Pension Scheme, some of the money that would have normally gone to the government as tax goes towards your pension instead. This helps to increase your savings for the future. Over the years this can add up to a substantial amount.

The amount of tax relief you get depends on the rate of income tax you pay. Basic-rate taxpayers (who pay 20% income tax) get tax relief at the same rate. If you’re a higher-rate taxpayer you get 40% tax relief, and additional-rate taxpayers get 45%.

You can put as much money as you want into your pension, but there are limits on the amount of pension savings that will benefit from tax relief each tax year and over your lifetime.  These limits are known as ‘tax allowances’ and may vary at the start of each financial year in April.

This financial year, 2022/2023, tax allowances have remained the same as last year.

  • Annual Allowance

This is the main tax allowance that will affect members of the Railways Pension Scheme. The Annual Allowance (AA) is the limit on your pension savings in a single tax year before you need to pay tax. For the year 2022/2023, this limit is either 100% of your annual earnings, or £40,000, whichever is lower.

  • Tapered Annual Allowance

The Tapered Annual Allowance (TAA) generally just applies to high earners and is a lower allowance. This allowance works on a sliding scale and if your income is over £200,000 it may affect you. This reduced allowance can change from tax year to tax year depending on your income.

  • Money Purchase Annual Allowance

You may be affected by the Money Purchase Annual Allowance (MPAA) if you start to draw money from your defined contribution (DC) pension pot. The Money Purchase Annual Allowance is currently set at £4,000.

  • Lifetime Allowance

The Lifetime Allowance (LTA) is the limit placed on your pension savings throughout your lifetime before you need to pay tax.  It affects those with large pension savings. The LTA has been frozen at £1,073,100 until 2025/26.

If you go over the Annual Allowance

If your pension savings in the Railways Pension Scheme are greater than either the AA or the MPAA, then we will send you a Pension Savings Statement (PSS) that will detail how much you have used in the tax year.

 You can apply to carry forward any AA that you haven’t used from the previous 3 years to the current tax year. However, no carry-forward is available for MPAA.

When you're retired

After you’ve retired, you must pay Income Tax on any income over your Personal Allowance. This applies to all your pension income, including State Pension.

What is my Personal Allowance?

In 2022/2023, the Standard Personal Allowance is £12,570. This means you’re able to earn or receive up to £12,570 in this tax year and not pay any tax.

If you earn or receive less than £12,570 this tax year, you’re a non-taxpayer.

If you’re a high earner and your adjusted net income is over £100,000, then your Personal Allowance will be lower than £12,570.

For more details, you can see our online Read as you Need guides, as well as a series of short videos on tax.