Pensions contributions trap

From 6 April 2011, the Annual Allowance (AA) limit on pension contributions which can attract tax relief will be £50,000 (reduced from £255,000 in 2010/11). This £50,000 limit includes contributions made by both the individual and, where appropriate, their employer.

Where contributions exceed the £50,000 limit, no tax relief at all will be available on the excess, and there will be a claw-back by HMRC of the tax relief given on the excess. This claw-back charge will be imposed on the individual, even if the contributions have been paid in whole or in part by the employer.

There is an additional trap in the detail of the transitional rules that applies NOW, and could have major consequences if not recognised and dealt with in time. 

The test of whether this new £50,000 limit has been exceeded is not contributions paid in the tax year, but instead is contributions deemed to have been paid in the pension input period (PIP) that ends in the tax year – and for 2011/12 this could well relate to a scheme’s PIP ending on a date which results in the inclusion of contributions actually made in the 2010/11 tax year. For those in defined benefit schemes (e.g. a public sector or final salary scheme) the position is further complicated, because the deemed contribution amount for that scheme for the purposes of the £50,000 limit is based on the benefits accrued during the PIP, rather than actual contributions made.

This means that individuals or their employers could be blithely contributing to pensions until 5 April 2011, believing the new rules do not take effect until after 6 April 2011, only to find that the individual will be hit by a large, unexpected tax charge next year.

There is a way around this though – provided action is taken very soon.

HMRC will, for the time being, allow the end date of a PIP to be changed retrospectively, so that any pension contributions paid on or before 5 April 2011 will not be caught.  

For a defined contribution scheme (e.g. a personal pension or SIPP), the member can nominate an alternative date by notice to the scheme administrator, but for a defined benefit scheme, only the administrator has the facility to change the PIP. If an individual is a member of more than one pension scheme it may be necessary to change the PIPs for them all.

However, the ability to make these retrospective nominations will end when the Finance Act 2011 receives Royal Assent.  The trouble is that this date is a moveable feast – based on earlier years one would expect it to be in July 2011 (although before 19 July, which is the date Parliament is to “break up” for the summer holidays) – but it would certainly be safest to ensure that PIP changes have been made before June if at all possible.

As all the rules restricting tax relief on pension contributions are extremely complicated,
it is vital that appropriate professional advice is sought if you think you might be affected.

If you have any questions please do not hesitate to contact your usual Ensors contact or Henry Wood for tax advice (email henry.wood@ensors.co.uk), or our team of independent financial advisors at Ensors Financial Planning (email bruce.clark@ensors.co.uk)

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