The “annual allowance” which is currently £255,000 will be reduced to £50,000 per tax year from 6th April 2011. Any contributions over this level will incur a tax charge effectively removing tax relief from the excess contribution.
Currently, higher rate tax relief on pension contributions is limited for those with income over £130,000 to contributions of £20,000 per tax year. There are higher limits for those who were paying higher levels of monthly contribution before April 2009 or whose average contributions over the 3 years ending April 2009 exceeded £20,000. These limits remain in place until 5th April 2011.
Generally speaking, high earners will thereafter be able to increase contributions to £50,000 and qualify for tax relief at up to 50%.
Furthermore, the concept of “carry forward” is being re-introduced from April 2011. The way this will work is that if contributions in 2008/09, 2009/10 or 2010/11 were less than £50,000 in any year, the shortfall may be carried forward into 2011/12 (or subsequent years).
Members of defined benefit (or Final Salary) pension schemes will be affected by the new rules. If the benefit accrual in a tax year exceeds £50,000, there will be a tax charge to pay. The method of valuing accrual is also changing to an equivalent capital value of 16 times (from 10 times) the additional pension accrued.
For example a member of a 60ths scheme on a salary of £180,000 will accrue a benefit of £3,000pa of pension in a year – this equates to a contribution of £48,000 (£3,000 x 16) for the purposes of the annual allowance. This is very close to the limit and any salary increase is likely to cause the allowance to be exceeded.
