I was sat in a pub with a friend recently and the conversation got round to pensions. It went something like this:
Friend – I’ve been thinking about putting some more money into my personal pension. Last time I looked into this, the maximum I could put in was 15% of my gross taxable earnings in any one tax year. Is this still the case?
Me – Ah! Things have changed. It’s all been simplified now. You can put in as much as you want …
Friend – Excellent!
Me – … except, if you go over your annual allowance, you’ll get hit for some pretty severe tax charges.
Friend – Oh … so how much ‘tax relieved’ contributions can I put in?
Me – Depends on your Pension Input Period.
Friend – My what?
Me – The actual Revenue definition is ‘the period over which you measure the amount of your pension saving’.
Friend – So not the same as a tax year?
Me – It could be … but not necessarily. In fact, it pretty certainly won’t be.
Friend – So what’s the maximum if my Pension Input Period ends after April 2011?
Me – Depends ….if it’s before 14th October, then, technically, £255,000 but the maximum contribution after 14th October 2010 is limited to £50,000. … unless.
Friend – Unless?
Me – you have unused relief from any of the three previous years. The Government has put in place some transitional arrangements which means you have a notional £50,000 for each of the last three years. If you haven’t used it all, you can carry it forward.
Friend – So, if I’ve put nothing into my pension in the last three years I could put in £150,000?
Me – Yes … except … how much do you earn?
Friend – £135,000 a year.
Me – Ah!
Friend – Ah?
Me – In that case you are deemed to be a high earner so the maximum contribution you could make before 5th April this year is £20,000.
Friend – £20,000?
Me – … or maybe £30,000.
Friend – Sorry?
Me – This is your Special Annual Allowance – it was introduced as an anti-forestalling measure by the previous Government when they attempted to restrict the tax relief for high earners. If you can demonstrate that you have made irregular contributions in any of the last three years with an aggregate value of £30,000 or more … your Special Annual Allowance is £30,000. Otherwise, it’s £20,000 … or, in some cases, between £20,000 and £30,000.
But, you see, the new Government then decided to stop messing around with tax relief and just limit the amount of tax advantaged contribution you could put in. So, the anti-forestalling measures are no longer required and have been removed under legislation, effective from the start of the next tax year.
Friend – But they still apply to this tax year?
Me – Oh yes! By the way, the tax charge is slightly different if you were to exceed the Special Annual Allowance –the Special Annual Allowance Charge effectively arises by restrciting the tax relief available on contributions in excess of the Special Annual Allowance to your basic rate so, in your case, it amounts to 20%. The Annual Allowance Charge is 40%.
Friend – (adopting glazed expression) I see (not really seeing at all). What about after April?
Me – Assuming you pay £20,000 before April 2011, between £30,000 and £130,000, depending on how much unused relief you’ve got available.
Friend – I’m not sure when my Pension Input Period runs from or to. What if my current Input Period ends before the 5th April? What would the maximum [tax relieved] contribution be?
Me – Hey, fill your boots, £255,000! Except ….
Friend – Except?
Me – You’re a higher earner so ….
Friend – I’m restricted to £20,000?
Me – Yep, anything over that would be subject to the Special Annual Allowance Charge.
Friend (with a hint of irony) – Well, thanks for clarifying that. I have another friend who’s in a defined benefit scheme – he asked me to ask you the same question.
Me – (Pause to reflect on the question) … did you see the football last night?
As the saying goes ‘you couldn’t make it up’. Actually, that’s not true, this is clearly a made up conversation (those of you who know me will know that I don’t go to pubs very often these days and I don’t have any friends).
The message, sadly, is not made up. There is a great deal of complexity around the reduction in the Annual Allowance from April this year and associated transitional arrangements. As intimated, there are added complications for Defined Benefit arrangements.
Up to now, the annual contribution limits have been generous and unlikely to be infringed except by all but the highest earners or those making large, one-off contributions. However, there is now significant potential for large numbers of active members to get tripped up by these legislative changes. For any type of scheme, trustees and/or employers should be communicating to members/employees, certainly in advance of April.
Individuals might want to seek the advice of their scheme administrator if they are a high earner (earning in excess of £135,000 per annum) and/or are making significant contributions. Alternatively, feel free to contact me or your usual Spence & Partners contact.