Money Matters - Spring 2011

A reduced sense of relief?

You could be affected by the Government’s latest plans to reduce the amount of tax relief available to individuals on contributions to pension schemes.

The plans were announced in mid-October and are designed to replace the special annual allowance charge rules from 6 April 2011. The necessary legislation, already published in draft, will form part of this year’s Finance Bill.

From 6 April 2011, the annual allowance will be reduced from £255,000 per tax year to £50,000. It will remain at this level until at least 2015/16, after which the Government will ‘consider options for indexing the level’. Alongside the reduction in the annual allowance several other changes are proposed:

The rate of the annual allowance charge will move from the current flat 40% to a variable rate, pitched at a level equal to the average rate of tax relief given on the excess contribution. The rate, therefore, will normally be between 40% and 50%.

A new basis will apply for valuing the increase in benefits if you are an active member of a defined benefits scheme. This will incorporate an adjustment for inflation (as measured by the consumer prices index (CPI)), but will potentially result in a higher value being placed on significant increases in pension rights.

A new three-year ‘carry forward’ of unused annual allowances will be introduced from 2011/12. Initially you will be able to carry forward unused annual allowance from 2008/09, 2009/10 and 2010/11, provided you were a member of any registered pension scheme during the relevant tax year. This concession is not as attractive as it sounds, because the exercise will assume that a £50,000 annual allowance applied for those years (rather than the actual figure) and use a notional carry forward calculation if total contributions exceeded £50,000 during a tax year.

From 2012/13 the lifetime allowance will be cut from £1.8 million to £1.5 million. The Government has made no comment about indexing this figure, although the draft legislation does allow for increases to be made by Treasury order.

For contributions made after 13 October 2010 there are complex rules based on the end date of each pension arrangement’s pension input period (PIP). While it is possible to amend PIPs, the best course of action is to seek our advice if your current or planned pension contributions in this or next tax year are nearing or above the new £50,000 limit, and/or you are already within the scope of the special annual allowance (very broadly gross income of £130,000 or more).

Carry forward
Brian has a self-invested personal pension (SIPP), to which he has made irregular lump sum contributions. His carry forward calculation is shown below:
Tax yearContributionAnnual AllowanceCarry forward calculationCarried forward to next tax year
2008/09£34,000£50,000£50,000 – £34,000£16,000
2009/10 £70,000 £50,000 £50,000 + £16,000 – £70,000 Nil
2010/11 £35,000 £50,000 £50,000 + Nil – £35,000 = £15,000
Brian’s carry forward amount is £15,000, (the unused notional annual allowance for 2010/11). The £16,000 carried forward from 2008/09 is deemed to have used 2009/10. Although the calculation for that year produces a negative figure, this is treated as nil for carry forward purposes.