TPAS - The Pensions Advisory Service

Contribution Limits

Occupational pension schemes that have been set up under Trust and have received approval under Chapter 1 Part XIV ICTA 1988 (this is the current legislation) can receive exempt approval status from HM Revenue & Customs (HMRC). This means that they are eligible to receive tax relief and therefore, contributions paid into the scheme, whether they are made by the employee or by the employer, are fully deductible for tax purposes.

Prior to 6 April 2006, a scheme member was permitted to make contributions to an exempt approved scheme at a rate of up to 15% of total remuneration. Remuneration relates to pay and benefits chargeable under Schedule E including profit related pay and amounts used to purchase partnership shares in share incentive plans, but excludes items such as share option gains and 'golden handshakes'. The Finance Act 1989 introduced an Earnings Cap that limited the amount of remuneration that can be used to calculate contributions in the following circumstances:

• Where the scheme came into existence before 14th March 1989 as regards to any employee who became a member of that scheme on or after 1st June 1989.
• Where the scheme came into existence on or after 14th March 1989, whenever the member joined.

In respect of the above scheme members, the remuneration that can be used to calculate the 15% is subject to the Earnings Cap. For the tax year 2005/2006, the Earnings Cap was £105,600. For previous years, the Earnings Cap was:

The Earnings Cap was a limit on how much of a scheme member's earnings could be used to calculate limits on contributions and benefits in an exempt approved scheme. This therefore limited the amount that a higher earner could contribute to a pension scheme be eligible for tax relief. Any averaging, for example, controlling directors was done before applying the cap.

From 6 April 2006 the restrictions on contributions were removed. However, tax relief is restricted to an Annual Allowance. Individuals can obtain tax relief on their contributions of up to £3,600 or 100% of earnings if greater. Contributions above this limit can still be made but the excess will not qualify for tax relief. Contributions that are not tax-relievable will not count towards the Annual Allowance.

An employer who offers an occupational pension scheme to his employees must contribute to it. This is one of the conditions of approval. HMRC will not approve a scheme if the employer's contributions appear to be a token contribution, that is, less than 10% of the total contributions to the scheme.

Q & As

How much can I pay into my pension?

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.

Can I contribute to an occupational pension scheme and a personal pension scheme at the same time?

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.

Can I use my redundancy payment to make an additional contribution to my pension scheme?

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.

How soon should contributions deducted by my employer be paid across to the scheme

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.

I live abroad, can I still contribute to a UK pension scheme?

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.