Pensions Tax Relief
Background
The Government announced, following the emergency Budget in June 2010, that it planned to review the proposed legislation on pensions tax relief. The transitional rules, including anti-forestalling provisions were retained until April 2011.
Straight after the Budget, the Treasury began a six week consultation with interested groups and on 14th of October 2011 the Government announced its proposals for change, which came into effect from 6 April 2011.The following is a summary of the current position
Rate of relief and annual allowance
Tax relief is available at an individual's marginal rate, i.e. higher rate tax-payers continue to receive 40% tax relief and additional rate taxpayers receive 50% tax relief. However annual allowance has been reduced from £255,000 to £50,000. This might still seem fairly generous, however this includes both the individual and employer contributions and any contributions in excess of this are subject to an annual allowance charge which removes all the tax relief. The tax charge itself is tailored to reflect the level of relief that has been received.
This limit applies to both defined contribution and defined benefit pensions. For defined benefit pension schemes a flat rate factor of 16 (up from a factor of 10) is used to calculate the deemed contribution.
The Treasury has introduced some flexibility whereby individuals are able to pay in excess of the annual allowance in a tax year by using any unused allowance from the previous three years. Likewise the unused amount can be used to offset any increases to benefits in excess of the annual allowance.
In November 2011, HMRC announced a new interpretation of the rules - it would allow individuals to be able to carry forward all unused relief of up to £50,000 per tax year, even if the annual allowance is exceeded in the 2009/2010 or 2010/2011 tax year, and still receive full tax relief.
'Scheme pays' may be possible in the future
Some people may be concerned about receiving large tax bills through inadvertently exceeding limits. The Government has said that this has been taken that into consideration and has introduced rules on options to pay the charge out of their pension (referred to as 'scheme pays')
Pension input periods don't need to be aligned
Original proposals to re-align pension input periods were dropped, although transitional arrangements were put in place for individuals with input periods ending in the 2011/2012 tax year to ensure contributions eventually fall into line. HMRC have provided some worked examples of this - available on the HMRC website.
Removal of 'last year' flexibility
It was previously possible for individuals to pay up to their earnings level in their last year of employment and receive full tax relief (there was no annual allowance test in the year benefits were taken). Likewise employer contributions were effectively only limited to the Lifetime Allowance. This flexibility has gone although consideration will be made for higher levels of funding in cases of early retirement on grounds of serious ill health. To build up the same size of retirement pots savings will need to start earlier than previously.
From April 2012, the Lifetime Allowance reduces from £1.8 million to £1.5 million. The flat rate valuation factor for the Lifetime Allowance remains unchanged at 20. Fixed Protection is available for those who have, or expect to have, funds in excess of £1.5 million at retirement. Fixed protection is available by applying to HMRC. The deadline for applying is 5 April 2012. This is not be available to those with Enhanced and/or Primary protection. Importantly, it is not possible to make any further pension contributions if opting for Fixed Protection.
For more information visit the HMRC website.
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