Several changes to pension’s legislation are due to take effect from 6 April 2011, now only a few weeks away.
One of these changes affects the Annual Allowance, which in some cases will limit the amount of tax privileges available on pension savings. The Annual Allowance is to reduce from £255,000 to £50,000. This presents an opportunity for some individuals to make use of the higher allowance before the end of this tax year, after which the opportunity will be lost.
Up to 6 April 2011, there may be an opportunity for individuals to pay contributions into a pension arrangement, and/or for employer contributions to be paid, up to the existing Annual Allowance of £255,000. The tax treatment of such contributions depends on whether the member is a high income individual or not. In brief:
Income* less than £130,000
• Up to £255,000 from all sources, including employer contributions, may be paid in the current tax year as long as the test against the Annual Allowance can be made in this tax year.
• To do this for large contributions, the pension input period (PIP) needs to end before 6 April 2011 so that contributions do not fall into the 2011/12 tax year and risk exceeding the new reduced Annual Allowance .
• If the PIP is shortened to end before 6 April 2011, it may be possible for further contributions to be paid, potentially up to the current Annual Allowance.
• A decision can then be taken on whether or not any further contributions will be paid in a new PIP which will end in the 2011/12 tax year.
• Full tax relief will be granted on personal or third party contributions paid up to 100% of UK relevant earnings .
• Employer contributions will receive corporation tax relief if the “wholly and exclusively” rule is satisfied.
* Relevant income is as defined by HMRC in their guidance for registered pension schemes at RPSM15101000 (as amended)
Income More than £130,000
If an individual has relevant income* of £130,000 or more in this or the previous two tax years, he or she is affected by the anti-forestalling provisions. On the basis that the individual does not have a protected pension input amount exceeding £20,000:
• Total personal contributions of £20,000 (up to £30,000 in some circumstances) may be paid and receive full tax relief in the current tax year.
• Company contributions will receive corporation tax relief (if these meet the “wholly and exclusively” rule) but the individual will be subject to the Special Annual Allowance (SAA) tax charge for any contributions (including employer contributions) in excess of £20,000 (or up to £30,000 if a higher SAA applies)
• Any personal contributions paid in excess of the SAA in the current tax year will receive basic tax relief
• Any contributions paid in excess of the new reduced Annual Allowance in a PIP which ends on or after 6 April 2011 will suffer a recovery charge. Excess contributions will be treated as the top slice of an individual’s income, meaning that all tax relief will be lost on that excess amount.
Other advantages for any higher and additional rate tax payers in making pension contributions can include:
• Reducing their liability to higher or additional rate tax
• Reducing their adjusted net income to below £100,000 in order to reinstate their full personal allowance.
Income £130,000 and restricted
Individuals with relevant income of £130,000 or more, who are currently restricted to tax relievable contributions of between £20,000 and £30,000 have an opportunity to make up for some of the shortfall from 6 April 2011 by using the new form of carry forward.
Time is running out, so if this is an issue for you - where you have significant earnings or wish to make pension contributions in excess of £50,000 please contact me as soon as possible for specific personal advice. The above is nothing more than explaining some of the key issues, more information is available on the HMRC website - which I have linked to throughout this piece.
Importantly for pensions:
£10,000 cheque = £12,500 invested (gross) with basic rate tax relief. Higher rate taxpayers can reclaim a further 20% relief on the £12,500 - another £2,500. So in practice, the net cost of a £12,500 pension investment is £7,500 for a 40% taxpayer. One of the few instances in life where you actually get some significant money back from HMRC as the "norm".
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