Pensions tax relief - the latest changes
In the Emergency Budget, the Government made it clear that it intended to replace a series of complicated changes to the pensions regime, due to start next April. Draft replacement legislation has recently been issued, with rules which apply to everyone, rather than targeting high earners.
Annual allowance
The main change will be to reduce the annual allowance (AA) from its current level of £255,000 to £50,000 with effect from 6 April 2011. AA is the amount by which the total pension savings can grow each year; above this value the surplus gives rise to an annual allowance charge as the individual's top slice of income.
Pension savings
Members of defined contribution (DC) schemes, in particular personal pensions (PPs), will need to look at the total of the contributions (whether personal, employer or third party) during the pension input period (PIP) for all of their pension savings. The PIP is usually the scheme year to the anniversary date which falls within the relevant tax year.
Members of defined benefits (DB) schemes, such as occupational final salary schemes, will have to work out how much their accrued pension hasincreased during the PIP.
Example
Self employed personal pension with AA charge
Alison, who is self employed, has taxable income of £110,000 in 2011/12. She is a member of two different PP schemes. Scheme A has a PIP ending on 31 March; Scheme B's ends on 30 November. She contributes £2,000 per month (£2,500 before basic rate tax relief) to Scheme A and £2,800 per month (£3,500 before tax relief) to Scheme B. She has been contributing similar amounts to these schemes for the previous three tax years. During the tax year ending 5 April 2012, her total pension contributions are:
| Scheme A (year to 31 March 2012) | £30,000 |
| Scheme B (year to 30 November 2011) | £42,000 |
| Total pension savings | £72,000 |
| AA for 2011/12 | £(50,000) |
| Excess subject to AA charge | £22,000 |
The AA charge will therefore be £8,800 (£22,000 @ 40%).
The three year carry forward rule
Unused AA for the previous three tax years can be carried forward and added to the current year's £50,000 AA. For the tax year 2011/12, the first of the new regime, carry-forward will be available against an assumed AA of £50,000 for each of the tax years 2008/09, 2009/10 and 2010/11. No carry forward is available from an earlier tax year unless the individual was a member of a registered pension scheme at some time during that tax year.
Lifetime limit
The lifetime limit, which sets the maximum figure for tax-relieved savings in the fund, currently stands at £1.8 million. However, this limit is to be reduced to £1.5 million, probably from April 2012. For more information on the new rules, please contact us.
