Pensions – The Annual allowance
I have just penned an article to be published in the UK200 Technical Advisor In Focus magazine and wanted to share it with you.
HM Revenue & Customs realise that, following reductions of the annual allowance (AA) for pensions, more people should be declaring on their tax returns an annual allowance charge. It is important that a return of any charge is made to avoid the possibility of interest and penalties. A potential liability is not well known but HMRC do not accept ignorance as an excuse.
The AA, i.e. the maximum pension savings that qualify for tax relief, reduced to £50,000 from 6 April 2011. The use of the term savings is done purposely because, importantly, the provisions apply not only to defined contributions schemes but also to defined benefit schemes (final salary schemes). Just as importantly, it applies to all contributions made to a pension scheme and, therefore, includes employer contributions.
If contributions exceed the AA the excess is liable to a charge at marginal tax rates. For most people caught by this provision, that will be 40% or, perhaps, even 50%.
The AA can be more than £50,000 because it increases by allowances unused in the previous 3 tax years. For these purposes, the allowance for 2008/09 through to 2010/11 are taken to have been £50,000 (although, they were higher). A simple example is that, if pension savings were £30,000 for each of the years 2008/09 to 2010/11, the allowance for 2011/12 is £110,000 (£50,000 plus £60,000 brought forward).
To further complicate the position, the concept of a PIP (pension input period) and how pension savings are calculated for defined benefits scheme, come into it.
PIPs do not have to follow the tax year but have to be allocated to tax years, as the pension savings of a PIP have to be compared to the AA for tax years, to calculate if there is a charge. This is achieved, normally, by allocating the PIP ending in a tax year to that tax year, i.e., PIP to 31 December 2011 ends in and is the PIP for the tax year 2011/12.
If the scheme is a defined benefits scheme the measure of pension savings is the increase in projected pension benefits in the PIP, which could bear no relationship to contributions made.
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ReplyDeleteI appreciate of course that you are using the lingua franca when talking about TAX RELIEF instead of the correct TAX DEFERRAL, in the same way as the press speak of ISA's being TAX FREE when there is no discernible tax advantage in them (most people who invest £10,600 p.a; in ISA's to avoid CGT when doubling their money are living in lala land-they should be so lucky!)butI do expect tax people to use a higher standard of phraseology.
ReplyDeleteThe monetary limit on contributions stated here is correct as far as it it goes. But these limits apply only to CONTRACT based schemes, i.e. a pension designated for INDIVIDUALS. By configuring a scheme as a DEFINED BENEFIT (or 'final salary') group scheme these limits on contributions do not apply. To give an example: BT's pension scheme does not name individual BT employees.Funding is on a tri-annual actuarial basis.
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