McCloud Remedy and Annual Allowance: How Public Sector Workers Are Affected 2026

The McCloud remedy is one of the most technically complex pieces of pension legislation to affect public sector workers in a generation. If you work in the NHS, education, civil service, police or fire service, it may change how much pension you have built up — and potentially trigger annual allowance tax charges going back to 2015.

This guide explains what the remedy is, how it interacts with the pension annual allowance, and what steps affected workers should take in 2026.

Background: What Were the 2015 Pension Reforms?

From April 2015, most public sector pension schemes moved from final salary (defined benefit) arrangements to career average revalued earnings (CARE) schemes. The government provided transitional protection for members who were within 10 years of their normal pension age on 1 April 2012, allowing them to remain in the more generous legacy final salary scheme.

Younger members were required to move to the new CARE arrangements — a decision that was subsequently challenged in the courts.

The Court of Appeal Ruling

In 2018, the Court of Appeal ruled in the case of McCloud and Sargeant that this transitional protection constituted unlawful discrimination on grounds of age. Because older workers received better treatment than younger colleagues with equivalent service, the arrangements breached the Equality Act 2010.

The government accepted the ruling and legislated a remedy through the Public Service Pensions and Judicial Offices Act 2022.

How the Remedy Works

The McCloud remedy operates in two parts.

The deferred choice underpin (DCU) applies to the period from 1 April 2015 to 31 March 2022, known as the remedy period. For this period, affected members will be returned to their legacy scheme as a starting position. When they reach retirement, they will be offered a choice: take the legacy scheme benefits for the remedy period, or take the reformed scheme benefits — whichever is higher.

The rolled-back legacy position means that, for pension input amount calculation purposes, members are treated as if they had remained in their legacy scheme throughout the remedy period.

This retrospective change is what creates the annual allowance complication.

Annual Allowance: A Refresher

The pension annual allowance is the maximum amount of tax-relieved pension saving you can make each year. For 2026/27 it stands at £60,000. This covers all pension contributions and benefit accrual across all your pension arrangements — including the notional value of defined benefit pension growth, not just cash contributions.

For defined benefit schemes, pension input amount is calculated using a statutory formula:

(Closing value of pension × 16) + lump sum − (Opening value of pension × 16 × CPI uplift) − lump sum

If your total pension input amount across all schemes exceeds the annual allowance, you face an annual allowance charge at your marginal income tax rate on the excess.

Tapered Annual Allowance 2026/27

High earners face a reduced annual allowance. If your threshold income exceeds £200,000 and your adjusted income exceeds £260,000, your annual allowance tapers down by £1 for every £2 of excess, to a minimum of £10,000. Many senior NHS consultants, senior civil servants and police superintendents fall within this taper.

How McCloud Changes Annual Allowance Calculations

When the remedy rolls members back to their legacy scheme for 2015 to 2022, the pension input amounts for those years are recalculated. Legacy final salary schemes typically accrue benefits differently from CARE schemes — for many members, the recalculated legacy scheme growth will be higher than the original CARE figures.

This means:

• Members who had no annual allowance issue under the reformed scheme may now find an excess under the legacy scheme figures.
• Members who already had an annual allowance charge may have a different (higher or lower) charge once recalculated.
• The charge applies in the year the excess arose — not in 2026.

The Remedy Period: 2015/16 to 2022/23

HMRC has confirmed that the McCloud remedy affects tax years 2015/16 through to 2022/23. For each of these years, scheme administrators must produce a Remediable Service Statement showing the revised pension input amounts.

The normal time limit for amending self-assessment returns is four years from the end of the relevant tax year. Without special provisions, most remedy period years would be out of time. However, HMRC has confirmed that members will be able to amend returns or submit late returns to account for remedy adjustments, with extended windows applying.

Scheme Pays and the McCloud Remedy

If an annual allowance charge exceeds £2,000, you may be eligible to ask your pension scheme to pay the charge on your behalf, in exchange for a reduction to your eventual pension. This is known as scheme pays.

The McCloud remedy creates additional complexity here. If you made a scheme pays election in a remedy period year based on the original reformed scheme figures, and the remedy changes your pension input amounts, you may need to make a new or revised scheme pays election. Deadlines for retrospective elections have been extended under the remedy legislation.

Schemes must honour mandatory scheme pays requests where the charge arises directly from remedy recalculation. Voluntary scheme pays may also be available.

What Happens at the Remedy Choice Point

When a member reaches retirement — or leaves the scheme — they will receive a remediable service statement setting out both sets of options:

1. Legacy scheme benefits for the remedy period (e.g. final salary accrual)
2. Reformed CARE scheme benefits for the remedy period

Members can choose whichever is higher, tax-free. The choice is irrevocable once made.

The annual allowance position will be reassessed based on whichever option the member selects. This means the definitive tax position may not be settled until the point of retirement.

Tax Charges on the Chosen Benefits

If the chosen benefits create a previously undeclared annual allowance excess for any remedy period year, the tax charge becomes payable. Conversely, if the original excess was based on incorrect figures, an overpaid charge may be refundable.

HMRC is working with scheme administrators to provide individual-level data so that members can understand their positions. Members of the NHS Pension Scheme have been particularly affected given the combination of the remedy and the tapered annual allowance issues that led to senior clinicians reducing their hours.

Practical Steps for Affected Workers

Step 1: Check your eligibility. You are likely affected if you were an active member of a public sector scheme on or after 1 April 2015 and were not within 10 years of normal pension age on 1 April 2012.

Step 2: Obtain your Remediable Service Statement. Contact your scheme administrator (e.g. NHS Pensions Agency, Teachers' Pensions, MyCSP, your LGPS administering authority) and request your statement. These are being issued on a rolling basis.

Step 3: Review revised pension input amounts. Compare the revised figures for each year from 2015/16 to 2022/23 against the annual allowance for that year. The annual allowance varied significantly across these years due to reductions in 2016 and subsequent increases.

Step 4: Identify any excess and quantify the charge. Excess pension savings are charged at your marginal income tax rate for the year in question. For many higher earners this will be 40% or 45%.

Step 5: Consider scheme pays. If charges are significant, a scheme pays election can spread the cost, though it reduces your ultimate pension.

Step 6: Seek specialist advice. This is not territory for DIY tax returns. A pension tax specialist or chartered financial planner with public sector pension experience should review your position before you make any elections or amend any returns.

The Bottom Line

The McCloud remedy is a significant correction to an injustice that has affected hundreds of thousands of public sector workers. But the retrospective nature of the fix means it creates real complexity around annual allowance calculations going back to 2015.

If you work in the NHS, teaching, civil service, police or fire service, you should not assume your annual allowance position is settled. Obtain your Remediable Service Statement, check the revised pension input figures for every year of the remedy period, and take specialist advice if any year shows potential excess pension savings.

The good news is that HMRC has recognised the complexity and extended the windows for amendments. Acting promptly — but carefully — gives you the best chance of resolving your position accurately.