As of 6th April 2011, the government reduced the annual pension allowance to ensure that only the first £50,000 of an individual’s gross pension contributions will attract higher rate tax relief at 40% or 50%.
But if you have not contributed to your pension for the last few years, or if your contributions have been limited by the special annual allowance of £20,000 or £30,000 in 2009/10 and 2010/11, there may be some scope to contribute more than £50,000 and still receive full higher rate tax relief.
If you have an existing pension scheme and have already made gross contributions of £50,000 (a £40,000 net contribution if made personally outside of payroll arrangements) in the pension input period ending in 2010/11, it is possible to look back to the previous 3 tax years and carry forward any “unused pension allowance”.
A notional £50,000 annual allowance is applied to the 2008/09, 2009/10 and 2010/11 tax years and any leftover allowance after actual contributions made can be carried forward to the current tax year.
For example:
| 2008/09 | 2009/10 | 2010/11 | |
|---|---|---|---|
| Notional annual allowance | £50,000 | £50,000 | £50,000 |
| Actual contributions made (gross) | £15,000 | £20,000 | £20,000 |
| Unused annual allowance | £50,000 - £15,000 = £35,000 | £50,000 - £20,000 = £30,000 | £50,000 - £20,000 = £30,000 |
In this example the total unused pension allowance is £95,000 which means that the taxpayer could make a total gross contribution of £145,000 in 2011/12 and, providing they have at least £145,000 of relevant earnings in the tax year, receive full higher/additional rate tax relief of up to 50%.
With murmurs of a complete withdrawal or restriction of higher and additional rate pension relief on the horizon, it would make sense for taxpayers to consider their position ahead of the Chancellors Autumn Statement on 29th November, as any changes could be effective from that date.
Please note that the example above is merely an illustration of a particular scenario; the pensions rules are complex and advice on your individual situation should be sought before any action is taken.
If you have an existing pension scheme and you are unsure of how much you can contribute, or would like some general advice on the tax relief available for pension contributions, please contact us.
The Tax Advisory Partnership is a member firm of the Chartered Institute of Taxation (CIOT). We are not Financial Advisors and are not regulated by the Financial Services Authority (FSA). Where appropriate we will work with your Independent Financial Advisor or we can introduce you to an IFA we have worked with in the past who can take care of the FSA aspects of any advice you require. However, our focus is on ensuring that any investment strategy you may select meets with your overall financial and taxation objectives.