Tax Relief
Contributions paid by you to an occupational pension scheme
(i.e. final
salary, career
average and money purchase) deducted through
your employer's payroll and attract tax relief.
The contribution is deducted from your gross pay before Income
Tax is deducted. This gives you tax relief on your
contribution 'at source'. If you're a basic rate tax payer, the tax
relief is 20% on the whole of your contribution. If you're a
higher rate tax payer, you get 40% tax relief on your
contribution.
Some higher rate tax payers will receive two rates of tax relief
on their contributions. This happens when earnings are just
above the threshold moving someone into the higher rate. For
example, your higher rate threshold is £45,000 and you earn
£46,000. £1,000 of your contribution attracts tax
relief at 40% and the excess at 20%.
Limits
The maximum amount you can contribute to
a pension plan, and on which you can receive tax relief,
is 100% of your earnings or £3,600, whichever is
greater. This is capped at the Annual Allowance (see below).
You can pay more than this but there will be no tax relief on
the excess.
Contributions can also be paid by the employer and these count
towards the Annual Allowance.
Annual Allowance
The Annual Allowance is an annual limit set by HMRC.
For money purchase schemes, it's the
limit on how much can be paid in total in a tax year.
For final salary and career
average schemes, the limit is on the value of your pension
accrual in a tax year.
The Annual Allowance for the tax year 2010/11 is
£255,000. The rates from 2006 through to 2016 are:
| The Annual Allowance: 2006/07 to
2015/16 |
| Tax Year |
Annual Allowance |
| 2006/07 |
£215,000 |
| 2007/08 |
£225,000 |
| 2008/09 |
£235,000 |
| 2009/10 |
£245,000 |
| 2010/11 to 2015/16 |
£255,000 |
Contributions paid in excess of the allowance or the value of
pensions that accrue in excess of the allowance give rise to a tax
charge of 40% on the pension scheme member.
For each scheme, the Annual Allowance is not applicable in the
tax year that retirement benefits are drawn.
Update on Tax Relief in 2009 Budget and the Pre-Budget
The Government's intention is to deliver a system of pension tax
relief that is fair and affordable. The recent introduction of the
additional rate of income tax at 50 per cent applying to
individuals on incomes of £150,000 and over would have
exacerbated this, as traditionally relief is given at the highest
rate available.
In order to address this situation the Chancellor of the
Exchequer, Alistair Darling, announced in his 2009 Budget speech
that he is to restrict higher rate tax relief on pension
contributions for those with incomes over £150,000. This will
be effective from 6 April 2011. This restriction is to apply to all
contributions including those from employers. Those who have never
earned in excess of £150,000 are unaffected, as are those who
continue with their regular pattern of contributions.
In anticipation of this change, Mr Darling announced that
legislation will be introduced to prevent individuals taking
advantage of the pensions tax relief while it is still available to
them at a higher rate (known as the Anti-forestalling legislation).
Click here to read HM Revenue & Custom's
guidance on these restrictions.
Further amendments were made in the Pre-Budget report on the
9th of December. To provide certainty for individuals
around whether they are affected, and also to reduce administrative
burdens for schemes, the Government is introducing a floor at
£130,000 of pre-tax income (including an individual's own
pension contributions, and charitable donations). Only individuals
with incomes at or above this level will need to establish the
value of the pension benefit funded by their employers. However, to
complicate matters, there is also a "look back" test which
some individuals will need to be aware of if their income was above
the relevant limit in previous tax years.
A taper will apply for those on gross incomes between
£150,000 and £180,000, gradually reducing tax relief on
pension contributions until it is restricted to the basic rate,
i.e. 20 per cent.
Two further guidance notes have been published on this
subject:
PBR Note 18 - Pensions: Restricting Tax Relief for High-Income
Individuals (Anti-forestalling)
PBR Note 19 - Pensions: Changes to Tax Rates for Special Charges
and the Special Annual Allowance Charge
A copy of these notes can be found here on the HMRC webpage:
http://www.hmrc.gov.uk/pbr2009/notes-pdf.htm
Also HMRC has issued a short factsheet comparing the differences
between the 2011 pension contributions changes and the
anti-forestalling rules which were brought in on the 22nd of April
2009. They also published a detailed technical note on
anti-forestalling. The factsheet and technical note can be viewed
by following the links below:
http://www.hmrc.gov.uk/pbr2009/pension_factsheet.pdf
http://www.hmrc.gov.uk/pbr2009/pen-annual-allow-2020.pdf
HMRC has also now added a new chapter to its Registered Pension
Schemes Manual (RPSM) covering the special annual allowance. One
version is full technical guidance and the other has been written
with pension scheme members in mind:
RPSM - Special Annual Allowance - Technical
RPSM - Special Annual Allowance - Member
Please be aware that this is a constantly changing area and
is also still under some consultation. Therefore the exact details
are still being revised quite often. Therefore for guidance we
would urge individuals to contact HM Revenue and Customs. They have
a helpline number on 0845 600 2622.
Q & A's
Before 6 April 2006, contributions to an occupational pension
scheme were limited to 15% of remuneration. From 6 April 2006 this
limit was removed. Instead, subject to an Annual Allowance,
individuals can obtain tax relief on their contribution of up to
£3,600 or 100% of earnings if greater. Contributions above
this limit can be made but the excess will not qualify for tax
relief. Contributions that are not tax-relievable will not count
towards the Annual Allowance.
Yes. Prior to April 2006 there were restrictions but these are
now removed. The only restrictions are the level of tax efficient
pension saving you can make, which is limited by the Annual and
Lifetime Allowances.
If the Inspector of Taxes agrees that the payment is assessable
under Schedule E, it may be possible for an arrangement to be
entered into with the employer which allows the payment, or part of
it, to be paid as an employer's contribution to the scheme. This
amount must be actuarially justified and allowable under the scheme
rules. However once the payment has been made to the employee this
option is no longer available.
Contributions deducted from your salary should be paid to the
scheme provider within 19 days of the end of the month in which the
deduction was made. If therefore, for example, your contributions
were deducted from your salary on 25th January, they must be passed
to the pensions' provider by 19th February. More generous rules
apply to contributions made on your behalf by your employer but
there should normally be some form of schedule outlining the due
dates of both employee and employer.
Only a 'relevant UK individual' is able to obtain tax relief on
contributions to a UK pension scheme. This means tax relief is
available in a tax year to any of the following:
- An individual with relevant UK earnings chargeable to income
tax for that year;
- UK residents at some time during the that tax year;
- An individual resident in the UK at some time during the 5
years immediately before that year, and when the individual became
a member of the pension scheme;
- Individuals or their spouses who have earnings from overseas
Crown employment subject to UK tax.
If you do not fall into any of these categories, you can still
contribute to a UK pension scheme, if its rules allow, but your
contributions will not qualify for UK tax relief.
