The Annual Allowance is the principal pension tax constraint affecting senior Armed Forces personnel. Senior Officers (Wing Commander / Commander RN / Lt Col and above) frequently encounter AA charges, particularly during years of promotion or high CPI revaluation. This guide explains the AA framework as it applies to AFPS members for 2026/27, including Pension Input Amount calculation, Scheme Pays, carry forward, McCloud compensation, and AVC strategy.
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What the Annual Allowance is
The Annual Allowance (AA) is the maximum amount of pension growth (Pension Input Amount, PIA) that can be accrued in a single tax year without triggering an income tax charge. For 2025/26 the standard AA is £60,000.
The AA was introduced in 2006 as part of pension simplification. It targets primarily senior public-sector personnel and high-earning private-sector individuals - including Service personnel approaching senior ranks.
How the PIA is calculated for AFPS
For defined benefit schemes like AFPS 75 / 05 / 15, the Pension Input Amount uses a formula:
PIA = (closing pension benefits − opening pension benefits) × 16
+ (closing lump sum − opening lump sum) × 1
− inflation-adjusted opening
The "× 16" multiplier reflects HMRC's actuarial valuation of defined benefit accrual. For AFPS 15 (CARE), the PIA in any given year is essentially:
PIA ≈ (annual pension accrual increase from this year) × 16
For a Wing Commander earning around £85,000 with 20 years AFPS service, the annual pension accrual increase is approximately £1,800 (£85,000 × 1/47). The PIA is therefore roughly £28,800 - well within the £60,000 AA in a normal year.
Triggers for AA breaches in Senior Officers
Three primary triggers cause Senior Officers to breach the AA:
1. Promotion in the year
A promotion from Squadron Leader to Wing Commander is a salary jump of around £15,000. The PIA in the promotion year captures both:
- One year of normal accrual on existing service (£28,000 in the example).
- The retrospective revaluation of all prior service to the new salary level (this can amplify PIA substantially in final-salary schemes - though not in AFPS 15 CARE).
For AFPS 75 / 05 (final salary closed schemes), promotion-year PIA can easily exceed £100,000 because all prior years' accrued pension recalculates upward.
For AFPS 15 (CARE), promotion-year PIA is more contained but still can breach AA in combination with other factors.
2. High CPI revaluation
The AFPS 15 scheme revaluates accrued pension at CPI annually. In years of high inflation (2022 to 2024 saw CPI peak above 10%), the revaluation drives PIA up substantially.
For someone with 20 years AFPS 15 service and £36,000 of accrued pension, a 10% CPI revaluation adds £3,600 of pension growth in the year - multiplied by 16 = £57,600 of PIA from revaluation alone.
3. McCloud remedy unwinding
The McCloud remedy can retrospectively change pension service between AFPS 15 (CARE) and AFPS 75 / 05 (final salary) for the period 1 April 2015 to 31 March 2022. This can cause significant retrospective PIA recalculation.
HMRC has special provisions to handle McCloud-related AA charges - see the section on McCloud Compensation below.
The AA charge
If PIA exceeds the AA in a tax year, the excess is chargeable at the Service person's marginal rate of tax:
| Marginal tax rate | AA charge on excess |
|---|---|
| Basic rate (20%) | 20% on the excess |
| Higher rate (40%) | 40% on the excess |
| Additional rate (45%) | 45% on the excess |
For a Senior Officer with PIA of £85,000 (AA breach of £25,000), at the higher rate, the AA charge is 40% × £25,000 = £10,000.
Tapered Annual Allowance
For Service personnel with adjusted income above £260,000, the AA tapers down by £1 for every £2 above the threshold, with a minimum of £10,000 at adjusted income above £360,000.
Few Armed Forces personnel reach this threshold - but Generals, Air Marshals, and Admirals do. For these officers:
- Adjusted income includes basic pay + X-factor + non-cash benefits.
- Pension growth in the year is added back to determine adjusted income for taper purposes.
- The taper interaction is technical and typically requires specialist advice.
Scheme Pays - settling AA from pension benefit
Members can elect for the AFPS to settle the AA charge from the eventual pension benefit rather than from current cash:
- Available for AA charges above £2,000.
- Reduces the eventual pension or lump sum at retirement.
- Member retains the full take-home now; pension is reduced later.
The reduction is calculated on a fair value actuarial basis. For a £10,000 AA charge settled by Scheme Pays, a member typically sees an actuarial reduction of around £400 a year off their pension at retirement (depending on age, service, and scheme).
For most Senior Officers, Scheme Pays is preferred to writing a cash cheque to HMRC - preserving current liquidity while the pension absorbs the cost.
Carry forward - using prior years' unused AA
Carry forward allows unused AA from the prior 3 tax years to be used in the current year:
- Available where the member was a registered pension scheme member in each year carried forward.
- Applied to the breach amount only after current-year AA is exhausted.
- Each prior year's unused AA can be used once.
For a Senior Officer with PIA of £85,000 in 2025/26 (breach £25,000), if their prior PIA history was:
| Year | PIA | AA | Unused |
|---|---|---|---|
| 2022/23 | £45,000 | £40,000 | £0 (breach) |
| 2023/24 | £35,000 | £60,000 | £25,000 |
| 2024/25 | £40,000 | £60,000 | £20,000 |
Total unused: £45,000 (across 2023/24 and 2024/25). The 2025/26 breach of £25,000 is fully absorbed by carry forward; no AA charge in 2025/26.
Carry forward is the single most powerful AA mitigation tool for members with an irregular PIA history. The Armed Forces Pension Scheme issues annual Pension Input Statements showing PIA - keep these to support carry forward calculations.
McCloud Compensation for past AA charges
The McCloud remedy created retrospective PIA changes for the remedy period 1 April 2015 to 31 March 2022. HMRC introduced compensation provisions:
- Refunds of past AA charges - where a member paid an AA charge that would not have been due under the corrected service position, HMRC refunds the charge.
- Compensation for tax interest - where the refund is processed late, HMRC pays compensation.
- Tax-free status - both the original tax and compensation are non-taxable in the refund year.
For Senior Officers, McCloud compensation can be substantial. Typical refunds for Wing Commanders / Lt Cols affected by promotion-driven AA charges in 2018 to 2022 range from £5,000 to £20,000.
AVC strategy - limited for AFPS members
Many public-sector pension members consider Additional Voluntary Contributions (AVCs) to top up their pension. For AFPS members, the value of AVCs is limited because:
- AFPS already provides extremely high accrual (1/47, employer effectively contributes 28%).
- AVCs cost the member full marginal rate on the contribution.
- The eventual benefit on a Money Purchase AVC is invested in standard pension funds, not AFPS-rate accrual.
- AVCs do not benefit from the AFPS structure - they are essentially separate DC pots.
Where AFPS AVCs do make sense:
- For Senior Officers approaching retirement with surplus income that would otherwise sit in cash savings.
- For tax-free cash optimisation - AVC contributions can fund the lump sum at retirement.
- For pensions+ salary sacrifice arrangements (limited in MOD context).
Most AFPS members are better off contributing to a separate SIPP for additional pension saving - but AVCs are a valid option for specific circumstances.
Action checklist for Senior Officers
For Service personnel with potential AA exposure:
- Track your PIA via the annual Pension Input Statement from Veterans UK / Defence Business Services.
- Save Pension Input Statements from prior 3 years for carry forward calculations.
- Plan timing of promotions where possible - a year with no other pay rises is ideal for absorbing promotion-year PIA.
- Use Scheme Pays for AA charges above £2,000 unless cash flow allows immediate settlement.
- Verify your post-McCloud PIA position - compensation may be due.
- Consider AVCs only in narrow circumstances; SIPP is usually the better DC vehicle.
- Engage Forces Pension Society (£35/year) for impartial annual review.
- For substantial AA exposure, consult a regulated FCA-authorised pension adviser experienced with Armed Forces personnel.
Common errors and what to do
Common AA-related errors for Senior Officers:
- Missed AA reporting on Self Assessment - the SA return must report any AA charge. Submit a corrective SA if missed.
- Incorrect Scheme Pays election - election must be made by the deadline (typically the July following the tax year end).
- Forgotten carry forward - easily missed, can save thousands.
- McCloud-period miscalculation - review pre-2022 statements when RSS arrives.
When to talk to a pensions specialist
A specialist becomes essential when:
- Your PIA has exceeded the AA in any of the past 4 years.
- You are within 2 years of retirement and need to plan AVC / commutation strategy.
- You face the McCloud remedy choice with material AA implications.
- You have served across multiple AFPS schemes (75 / 05 / 15) with complex history.
- You have private practice income alongside Service pay (not common in Armed Forces, but happens with Reservist commitments).
A regulated FCA-authorised pension adviser experienced with AFPS members is the right specialist for these cases.
Disclaimer
PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated pension or financial advice. The Annual Allowance and AFPS pension input calculations are technical and interact with McCloud remedy rules, HMRC tax provisions, and individual service history - for substantial decisions especially around AA charges, Scheme Pays, carry forward, or McCloud compensation, consult a regulated FCA-authorised pension adviser experienced with Armed Forces personnel.
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