University of Reading cookie policy

We use cookies on to improve your experience, monitor site performance and tailor content to you.

Read our cookie policy to find out how to manage your cookie settings.

Pensions and Taxation

Members of registered UK pension schemes receive tax advantages through their scheme membership. The main advantage being that contributions paid to pension schemes receive tax relief. There are, however, limits set by His Majesty's Revenue and Customs (HMRC) on the amount of tax relief members can receive on their retirement benefits they build up each year and the amount of cash that can be taken tax-free on retirement. It is important that members understand how these allowance limits work to ensure they do not accidentally incur a tax charge and what options are available to them should they be likely to fall foul of the limits. Previously, there were also limits on the total tax-advantaged benefit a member could build up in their lifetime, known as the Lifetime Allowance (LTA). However, during the 2023 Spring Budget, it was declared that the LTA would be abolished altogether by 6 April 2024.

Please see below for further details regarding these allowance limits and how they may affect your pension savings.

Annual Allowance (AA)

The AA is the maximum amount of pension savings you can build up each year before you get a tax charge.

Pension scheme members will likely be affected by the AA limit if the value of their pension savings built up in a tax year (in all pension schemes) exceeds £60,000. The pension savings built up during the tax year are measured against the AA limit using a method set out by HMRC.

For benefits built up in defined benefit arrangements (such as the USS Retirement Income Builder and UREPF), the AA limit is measured against the value of the pension benefits accrued over the tax year and not on the pension contributions paid in.

For benefits built up in defined contribution arrangements, (such as URPS and the USS Investment Builder), the measure is based on the contributions that the member and the employer have paid into the pot only (and not whether they have been affected by investment returns).

Money Purchase Annual Allowance (MPAA)

If members have already drawn upon their defined contribution benefits from any savings pot they have (such as their URPS account, their USS Investment builder or from another personal savings pot), they will trigger a new allowance limit for their future defined contribution savings called the Money Purchase Annual Allowance (MPAA). The MPAA limits how much members can pay into a defined contribution arrangement before they need to pay tax. The MPAA limit is currently set as £10,000 per year. If members and the University make contributions to URPS or the USS Investment Builder that exceed this limit, the member would need to pay additional income tax and it would cancel out tax relief that would have been received automatically. Unlike the AA, members cannot carry forward any unused MPAA from previous years. For further information for URPS members on the MPAA, please Aviva's MPAA webpage. For further information for USS members, please visit USS's MPAA webpage.

USS members and the Annual Allowance 

USS will tell members how much of the AA they have used during the previous tax year within their yearly Annual Member Statements (issued in late autumn). If a member exceeds the AA limit, it does not mean that they will automatically have a tax charge as it is possible to carry forward any unused AA from the previous three tax years to cover any charges. Should a member of USS have an AA charge, they can ask the scheme to settle all or part of the tax bill by using an option called "Scheme Pays" in exchange for a reduction to their USS benefits. This option is only available where the AA tax charge is at least £1,000 and has arisen solely through membership of USS (as opposed to through membership of another scheme).

USS provide a Contributions and Tax Calculator to estimate how much AA members have used up with the scheme. USS also provide an AA Worksheet to help members calculate the AA used over the tax year if they are also building up pension benefits through other arrangements. Please visit the USS website for more information about the AA.

If you’re getting close to your Annual Allowance (AA) limit and you earn over the salary threshold, you could use a Voluntary Salary Cap (VSC) to help manage the amount of tax you pay. More information about the VSC can be found on USS's VSC webpage.

USS members and the Tapered Annual Allowance (TAA)

For higher earners, who have both a Threshold Income of over £200,000 and above and an adjusted income over £260,000, they may be affected by the TAA which further limits the amount of tax relief high earners can claim on their pension savings by reducing their annual allowance to be as low as £10,000. For further information on the TAA, please visit USS's TAA webpage.

Lifetime Allowance (LTA)

Before 6 April 2023, the Lifetime Allowance (LTA) limit was the total amount of pension benefits that a member could take from all of their pension arrangements before incurring a tax charge. The LTA limit was set at £1,073,100. If pension scheme members exceeded the LTA, any lump sum benefits over the limit received a 55% tax charge, and any benefits taken as pension over the limit received a 25% tax charge.

Between 6 April 2023 to 5 April 2024, the LTA limit remained at £1,073,100 but no LTA tax charge applied. Instead, any benefits (lump or pension) that exceeded the LTA would be taxed at the member’s marginal rate.

On 6 April 2024, the LTA will be abolished and will be replaced by three new allowances. Until 6 April 2024 is reached, administrators will still test their members’ benefits against the LTA limit but there is no longer a requirement for members to pay an LTA tax charge if they exceed the limit. Although the LTA tax charge no longer applies, the various LTA protections that members may hold are still relevant in the calculation of tax-free cash rights and the taxation of certain lump sum payments.

For USS, if a member has used up their LTA, they may allow the member to choose whether to take their benefits above the LTA as either a pension and/or a lump sum. If the member elects to take any benefits that exceed the LTA as an LTA excess lump sum, this lump sum will be taxed at the member’s marginal rate of tax.

If you are a USS member who is close to the LTA limit and wish to stop building up retirement benefits but keep your life and ill health cover, you can find more information about enhanced opt outs here.

Further information and guidance regarding the LTA can be found on MoneyHelper's LTA webpage and on USS’s LTA webpage.

Allowances Replacing The LTA From 6 April 2024

From 6 April 2024, the LTA is due to be replaced with three new tax-free allowances. The Lump Sum Allowance (LSA), the Lump Sum and Death Benefits Allowance (LSDBA) and the Overseas Transfer Allowance (OTA).

In respect of retirement, the LSA will introduce a limit on the total amount of tax-free lump sum cash individuals can take from all their pension arrangements in their lifetime. Any lump sum cash benefits taken in excess of this amount will be subject to Income Tax at the individual’s marginal rate. The LSA limit is set as £268,275, which is 25% of the current LTA of £1,073,100. However, if members have already taken benefits before 6 April 2024, their LSA allowance amount will be reduced and a transitional calculation will need to occur to work out a member’s remaining LSA amount.

Individuals who hold LTA protection will have a higher LSA where the protection remains valid. If you hold LTA protection, please see the following website regarding LTA Pension Protection for further details.

Please note, it is still possible to apply for LTA protection if your pension savings were worth more than £1 million as of 5 April 2016. If you wish to explore this option further, please see how to apply for protection here.

For more guidance on the abolition of the LTA, please see here.


Please note that the University's Pensions Office is not able to give staff financial advice or advice relating to pension tax issues. As the above allowances are personal tax issues, should staff wish to engage with an advisor, local ones may be found via the following website: at

Please note that USS also have a dedicated webpage to help their members who wish to seek a Financial Adviser.