Paul Leatherbarrow, Liverpool
The emergency Budget in June 2010 introduced the Coalition’s alternative proposal to limit tax relief on pension contributions in the future.
The intention is to do this by reducing the annual allowance (currently £255,000) to £50,000 from 6 April 2011 onwards.
Under the anti-forestalling regime Which will last to the end of the 2010/11 tax year, anyone with relevant income of less than £130,000 in the current and previous two tax years can personally contribute up to 100% of their relevant UK earnings with full tax relief.
This is provided the input period ends before 6 April 2011. Or an employer could contribute to the individual’s pension plan, an amount up to the annual allowance without the individual suffering any tax charges. Those on relevant incomes higher than £130,000 may have their tax relief restricted. What’s the effect of this change?
Let’s consider the example of Paul who has earnings of £90,000 (and total income of £100,000). Paul is not caught by the anti-forestalling restrictions and could pay a personal contribution of up to £90,000 in 2010/11 with full tax relief. That’s provided the input period ends before 6 April 2011 or his employer could pay a contribution of up to £255,000 without Paul having any tax consequences on that payment.
However, for 2011/12 (for input periods that end from 6 April 2011 onwards) the maximum contribution with full tax relief and no tax charges for Paul will be the reduced Annual allowance of £50,000.So 5 April 2011 is the last chance for Paul to tax-efficiently pay a contribution, or have a contribution paid by his employer, of more than £50,000 and this is fairly straightforward.
Pension input periods A plan that commenced on the 1 December 2009, for instance, is likely to have been set up with an input period that ends 12 months later on 1 December 2010. 1 December 2010 ends in the 2010/11 tax year and any contribution which is paid during this input period is tested against the annual allowance of £255,000 for 2010/11.
A plan that commences on the 1 December 2010 will be set up with an input period that ends 12 months later on 1 December 2011. 1 December 2011 ends in the 2011/12 tax year and any contribution which is paid during this input period is tested against the annual allowance for 2011/12 – £50,000. Personal contributions If contributions are personal, individuals who are not caught by the anti-forestalling rules can only claim tax relief on contributions of up to 100% of relevant UK earnings.
This means the maximum personal contribution, with full tax relief to a plan with an input period ending in 2010/11 is £149,999. Income of more than £149,999 would limit the total contribution to the special annual allowance, of £20,000, increased special annual allowance of £30,000 or the protected pension input amount, for the 2010/11 tax year.
Take benefits before 6 April 2011 As well as reducing the annual allowance to £50,000, the Government has also decided to remove the rule that allows exemption from the annual allowance tax charge in the year that all benefits come into payment. This also means that provided all benefits are taken before 6 April 2011, an employer contribution of more that £255,000 could be paid and an individual who isn’t caught by the anti-forestalling rules would avoid a tax charge.
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