Tax Relief
Contributions paid by you to a personal pension plan or a
stakeholder pension scheme
are made net of basic rate tax (i.e. 20%). This means that for
every £100 you want to save, you only pay £80. Tax
relief of £20, topping your contribution up to £100, is
then added by HM Revenue & Customs (HMRC).
If you are a higher-rate tax payer (i.e.40%), you may able to
claim additional tax relief. Depending on how much you earn over
the higher rate tax band, any additional tax relief would range
between a further 1% up to a maximum of 20%.
Limits
The maximum amount you can contribute to a personal pension plan
or stakeholder pension scheme, 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.
The Annual Allowance
The Annual Allowance is an annual limit set by HMRC. Contributions paid
in excess of this amount are unlimited but will give rise to a tax
charge on the pension scheme member.
The Annual Allowance for the tax year 2010/11 is £255,000,
inclusive of your own contribution and any other amounts paid into
an approved pension scheme. The Annual Allowance increases each
year. The rates until the tax year 2016 have already been set and
announced. They 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 in excess of the Annual Allowance can be made but
will be subject to a special tax charge of 40%. In measuring
contributions against the annual allowance, contributions paid to
an arrangement from which all benefits are taken in a particular
tax year will be ignored. This effectively means that in the fund
year in which you retire and take your benefits, there is no charge
in respect of any contributions paid in excess of the Annual
Allowance for that year.
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
Yes, the old rules which prohibited this unless you earned less
than £30,000 p.a., have been scrapped. You can now have
contributions paid into as many schemes as you want.
Any payments you make are totaled over all schemes to be
measured against your total earnings. All contributions, yours and
employers, are totaled and measured against the Annual Allowance
(£255,000 in the tax year 2010/11).
Your pension earned under the scheme at the end of the year is
calculated and measured against that which applied at the beginning
of the year. The difference in pension is multiplied by 10 and this
is taken as the value of the contributions paid into that scheme in
that year. The member's own contributions are ignored in the
calculations. However, money purchase AVCs payments are counted as
additional payments.
The amount of the pension earned at the beginning of the year is
increased by a factor to allow for normal earnings growth. This
factor is the greater of 5%, the increase in the RPI, and an amount
prescribed by regulation.
No. The old carry forward and carry back rules have been
scrapped.
No, such contributions are ignored.
You can pay as much as you want in any year, but tax relief is
limited to the amount of your earnings, no matter which year they
are paid.
If your earnings are less than the Annual Allowance
(£255,000 in tax year 2010/11), you or your employer can
contribute, without limit, in the year in which you take your
benefits.
Yes, you can continue to contribute for up to 5 years.
Yes, but contributions made to personal pension plans to fund
term assurance policies on or after 6 April 2007 do not attract tax
relief unless the application form was received by the insurer
before 16 December 2006 and the policy was taken out as part of the
pension scheme before 6 April 2007.
If contributions do attract tax relief, entitlement to relief
will cease if the contribution is varied outside of its original
terms.
Whether you are in a company or individual pension scheme, any
pension contributions made 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. With regard to employer
contributions, the employer must produce a schedule each year which
shows what contributions will be paid and the dates by which they
will be paid.
