Pension Changes - again!

November 2010

Steve Vickers
Tax Partner

Anyone following these things will be aware that over the last 4 years or so pension contributions and the tax relief available on them seems to have been constantly changing.

In 2009 the then Labour government proposed changes to tax relief on pension contributions that were to take effect in April 2011. They proposed that an income tax charge be levied on high earners through a reduction in the relief available. The result of these regulations being delayed until April 2011 was that special rules had to be applied for 2009/10 and 2010/11 which involved higher earners suffering a special income tax charge on contributions over the prescribed limit.

The proposed rules changes that were to be introduced in April 2011 were overly complicated, and as a result the new coalition government went into a consultation process about how to simplify them. The result of that consultation process and the proposed new rules were announced by the government last month.

The basic announcements are that:

The annual allowance for tax privileged pension contributions will be reduced from £255,000 to £50,000, and
The lifetime allowance will be reduced from £1.8m to £1.5m

The annual allowance is the maximum pension savings an individual can make each year that benefit from tax relief, and includes not only personal contributions but also that of anyone else, for example employers. From 2011/12 anyone exceeding the annual allowance will pay a tax charge on the amount over the available allowance. For example, if you contribute £60,000, £10,000 will be subject to a tax charge. This tax charge will be at your marginal rate, meaning that in most cases the charge will be at 40% or 50%.

The new legislation is not free of complications.

Special provisions are in place to deal with those who may have inadvertently already exceeded the £50,000 allowance. This could happen because an individual’s pension contributions for a particular tax year are measured based on input periods which in most cases do not coincide with the 5 April tax year.
If an individual has been a member of a registered pension scheme in the last three years, any unused allowance (up to a maximum of £50,000 per year) is available to be carried forward and utilised in a later period.

In short if you have made significant pension contributions or intend to do so seek help to ensure you don’t end up with an unexpected tax charge.

Steve Vickers, Tax Partner at Hart Shaw. T: 0114 251 8850, Email: steve.vickers@hartshaw.co.uk.