From 6 April 2011 the rules have 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, becomes £50,000 (£40,000 net of basic rate tax). Pension savings in excess of this amount will be subject to a tax charge (the annual allowance charge) which will be collected via self assessment and in effect removes tax relief on this excess.

Even though pension savings may be more than £50,000 for a tax year, the charge may be reduced or not apply at all if your pension savings were less than that for earlier years. You can carry forward unused allowances from the three previous tax years to reduce the amount of tax due for a year. 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. You must have been a member of a registered pension scheme to have an unused annual allowance to carry forward from an earlier year. If you have been a member of a registered pension scheme but, in one particular year, have not made pension savings for that year then you can carry forward an annual allowance of £50,000 from that year. If however, you have not been saving in a registered pension scheme then you will not have unused annual allowance to carry forward from that year.

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.

For further advice, please contact us.