Is My LGPS Pension Taxable? Everything You Need to Know About Tax and Your Local Government Pension

Understanding the Tax Implications of Your LGPS Retirement Benefits

So you’ve been diligently contributing to your Local Government Pension Scheme (LGPS) for years, and now you’re wondering about the tax situation when it’s time to cash in on those hard-earned benefits I totally get it – nobody likes surprises when it comes to taxes, especially in retirement!

Briefly, your LGPS pension is taxed as income, but any lump sum you get is not taxed. The amount of tax you pay on your pension is based on how much money you make from all sources.

But there’s a lot more to understand about how taxation works with your LGPS pension, and I’m here to break it down for you in simple terms Let’s dive in!

LGPS Pension Contributions: Tax Relief While You’re Working

First things first – there’s some good news when it comes to your LGPS contributions while you’re still working:

• Your contributions to LGPS are tax-free up to certain limits
• For most people, this means you get tax relief on the money you put into the scheme
• This tax relief is usually given automatically through what’s known as the “net pay arrangement”

However, there are some limits to be aware of. While you can technically contribute as much as you want to your pension, you’ll only receive tax relief up to your taxable earnings for that tax year.

Annual Allowance: Limits on Your Pension Growth

The annual allowance is something every LGPS member should understand. This is the amount your pension savings can increase by in a year without triggering extra tax charges.

For the 2023/24 tax year onwards, the standard annual allowance increased to £60,000 (up from the previous £40,000).

Most people won’t be affected by the annual allowance because their pension savings don’t typically increase by more than £60,000 in a year. However, you might be impacted if:

• You have final salary membership and get a significant pay increase
• You combine a previous LGPS pension benefit with your current one
• You transfer pension rights from another public service pension scheme
• You pay high levels of additional contributions
• You’re a high earner
• You’ve accessed flexible benefits since April 2015

If the growth in your pension savings goes over the annual allowance, you’ll have to pay taxes on the extra. But don’t worry! There’s a feature called “carry forward” that lets you use allowances you haven’t used in the last three tax years.

Tapered Annual Allowance for Higher Earners

If you’re a high earner, the annual allowance rules get a bit more complicated. The annual allowance gets reduced or ‘tapered’ if your ‘Threshold income’ and ‘Adjusted income’ exceed certain limits.

Here’s how the limits stand from 2023/24:

Your annual allowance goes down by £1 for every £2 that your Adjusted Income is above the limit.

Tax and Your LGPS Pension Payments

When you finally retire and start getting your LGPS pension, here’s what you need to know about taxes:

• Your LGPS pension is taxable income – it will be added to any other income you receive
• The tax is deducted at source through the PAYE system, just like when you were working
• Your pension fund will notify HMRC that you’re receiving a pension
• You’ll be issued a tax code which determines how much tax is deducted

However, there’s a big bonus with the LGPS:

• Your lump sum is completely tax-free! You can generally take up to 25% of the value of your benefits as a tax-free lump sum.

Lump Sum Limits (From April 2024)

The government introduced two important lump sum limits from April 6, 2024:

1. Lump sum allowance: £268,275

   • This limits the amount of tax-free cash you can take from your pension
   • If you exceed this, the excess is taxed at your marginal rate

2. Lump sum and death benefit allowance: £1,073,100

   • This applies to various lump sums including pension commencement lump sums and death benefits
   • Exceeding this also results in tax at your marginal rate

For most LGPS members, these limits won’t be an issue, as the maximum lump sum they can take is usually much lower than these thresholds.

The End of the Lifetime Allowance

Here’s some good news that might affect your pension planning:

The lifetime allowance (LTA) used to be a cap on the total amount of pension savings you could accumulate without incurring extra tax. As of April 6, 2023, the lifetime allowance charge has been removed, and from the 2024/25 tax year, the lifetime allowance will be fully abolished.

This means you no longer have to worry about this particular tax charge on your total pension savings. However, if you incurred LTA charges before April 6, 2023, you’re still liable to pay them.

What Should I Do If I Exceed Allowances?

If you do find yourself exceeding the annual allowance, you have some options:

1. Report it to HMRC through your self-assessment tax return
2. Consider ‘scheme pays’ – if the tax charge is more than £2,000, you can ask the LGPS to pay the tax for you in exchange for a reduction in your pension benefits
3. Use the 50/50 section of the LGPS to slow down your pension build-up (you pay half the normal contributions and build up pension at half the normal rate)

The deadline for making a ‘scheme pays’ election is typically July 31 in the year following the tax year in which the tax charge becomes due.

Practical Example: How Annual Allowance Works

Let me share a quick example to make this clearer:

Imagine your pension benefits increase by £70,000 in the 2023/24 tax year. This exceeds the £60,000 annual allowance by £10,000.

However, you didn’t use your full allowance in the previous three years:

• 2022/23: Used £30,000 of £40,000 (£10,000 unused)
• 2021/22: Used £35,000 of £40,000 (£5,000 unused)
• 2020/21: Used £38,000 of £40,000 (£2,000 unused)

You can carry forward the total unused allowance of £17,000, which more than covers your £10,000 excess. In this case, you wouldn’t face an annual allowance tax charge!

Common Questions About LGPS and Tax

Do I pay tax on local government pension?

Yes, your LGPS pension is taxable income. However, any lump sum you take (typically up to 25% of your pension pot) is tax-free.

Will my tax code change when I start receiving my pension?

Yes, the LGPS fund will notify HMRC when you start receiving your pension, and you’ll be issued a new tax code. If your tax code isn’t known immediately, a temporary code will be used.

What if I have questions about my tax code?

If you have questions about your tax coding, you should contact your local tax office, quoting your National Insurance number.

Can I reduce my tax liability from my LGPS pension?

You might be able to reduce your tax liability by considering when and how you take your benefits. For instance, you might phase your retirement to manage your income levels. It’s worth discussing this with a financial advisor.

Final Thoughts on LGPS Taxation

Understanding the tax implications of your LGPS pension is super important for effective retirement planning. While it might seem complicated at first (and honestly, some parts ARE a bit complex), breaking it down piece by piece makes it more manageable.

Remember, your LGPS pension will be taxed as income, but you get that lovely tax-free lump sum as a sweetener! Plus, the removal of the lifetime allowance charge is a significant benefit for many pension savers.

We always recommend chatting with a financial advisor about your specific situation. They can provide personalized guidance tailored to your circumstances and help you navigate the complexities of pension taxation.

Have you started thinking about how tax will affect your LGPS pension? Drop me a comment below with any questions you might have, and I’ll do my best to help!

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Disclaimer: Tax rules can change, and this information is based on the current regulations as of October 2025. Always seek professional financial advice for your personal circumstances.