From 6 April 2011 the rules changed on tax relief on pension savings. The annual allowance, which is the maximum amount of pension saving that benefits from tax relief each year per individual, became £50,000 (£40,000 net of basic rate tax). If you have been saving in a registered pension scheme since 6 April 2008 and your pension savings were less than £50,000 per annum in any of the tax years since then, then you will have an unused annual allowance to carry forward from that year/years. Unused allowances can only be carried forward for three years so the unused allowance from 2009/10 will not be carried forward after 5 April 2013. There is a strict order in which you use up your annual allowance. You use the current tax year annual allowance first, then use your unused annual allowance from earlier years, using the earliest tax year first.Hence, to use any unused allowance of 2009/10 you must have pension savings in excess of £50,000 for the current year. The annual allowance is set to reduce in 2014/15 from £50,000 to £40,000 together with the lifetime allowance.
If however, you have not been a member of a registered pension scheme in earlier years then you will not have unused annual allowance to carry forward.
Any member can make contributions up to the ‘basic amount’ of £3,600 (£2,880 net of basic rate tax). Contributions above this amount on which a member can claim relief in any tax year is subject to the member not exceeding the lifetime allowance, currently £1.5 million, and is the lower of:
- the amount of the individual’s relevant UK earnings (broadly salary, self employment and other earned income) that are chargeable to income tax for the tax year, and
- the annual allowance, currently £50,000 (£40,000 net of basic rate tax).
If you are self-employed, contributed into a pension scheme in 2011/12 and have made no contributions so far in the current tax year, then your payments on account for 2012/13 are based on your 2011/12 position. If your 2012/13 total income is similar to 2011/12 and you do not make a pension contribution by 5 April 2013 then you may have a large balancing payment of tax due by 31 January 2014 together with a higher payment on account for 2014/15.
Your pension savings in a tax year is the total of the increase in value for each scheme of which you are a member.
For personal pensions, the increase in value is the amount you have contributed in the period, grossed up to cover the basic rate tax added by HM Revenue & Customs (HMRC), for example if you pay £500 a month into a personal pension, this is grossed up to £625 a month and your pension savings for that scheme will be £7,500.
For workplace pension schemes, the value of contributions made by your employer is also included in your pension savings. Where the scheme is a money purchase/defined contribution scheme, the increase in value for the period is the gross amount you have contributed out of your pay together with amounts contributed by your employer. For defined benefits schemes, the amount of your pension savings is the increase in the value of your promised benefits over the pension input period ending in the tax year. The valuation is based on a notional ‘capital ‘ value broadly based on 16 times the amount of annual pension achieved to date and any additional separate lump sum . Your pension scheme administrator will be able to provide you with a pension savings statement if you think your savings will be over the £50,000 allowance.
Please note that your payment should be received by your pension saving scheme by 5 April to obtain tax relief in 2012/13.
There are a number of wrinkles in the general situation set out above that may apply in particular unusual situations, so you should always check with us before making decisions.
