High earners hoping to boost their pensions in 2011 are being urged to check how much they are paying in – as they could be stuck with two separate tax charges if they overpay by mistake.
Pension advisers are telling companies and senior executives to get their affairs in order before new rules restricting how much can be paid into a pension come into effect in four months’ time.
From April, it will only be possible to pay in up to 50,000 a year with tax relief, under new rules outlined by the coalition government in October.
However, some high earners are still subject to “anti-forestalling” restrictions put in place by the previous Labour government, meaning they could come under two sets of rules at once.
Since April 2009, anyone earning more than 130,000 who has a history of irregular contributions to a pension has only been able to pay in 20,000 a year with tax relief. From April, they therefore stand to benefit from the higher 50,000 annual limit – and will also be able to carry forward up to three years of unused 50,000 annual allowances.
Consequently, those who have only been able to pay in 20,000 for the past two years will be deemed to have unused allowances of 30,000 in both years under the new regime – meaning they could contribute 50,000 + 30,000 + 30,000 = 110,000 in the tax year beginning April 6.
However, advisers say that many senior executives are unaware of which regime they fall under, because they do not know the dates of their “pension input period” (PIP).
Confusingly, many pension schemes operate PIPs that do not coincide with the April 6-April 5 tax year.
Those with a PIP that ends on or before April 5 2011 will still fall under the old regime. But schemes with a PIP that ends on or after April 6 2011 – for example, a scheme that runs June 1 to May 31 – will already come under the new regime. As a result, people in schemes with a PIP that straddles the tax-year end are already subject to the new 50,000 annual contribution limit. For savers who were caught by the 20,000 “anti-forestalling” limit, this is an improvement. However, for other high earners, this represents a big reduction on the 255,000 contribution limit that applies in the current 2010-11 tax year.
Those who inadvertently overpay into their pension will have to pay income tax at their normal rate on the excess contributions, via a self-assessment tax return.
In a worst-case scenario, a pension saver who was subject to the 20,000 limit from April 2009 but is in a scheme with a PIP that is subject to the new regime could face two tax charges for accidental overpayment.
Many senior executives assume that their pension trustees will be aware of this situation – but advisers say this is often not the case.
“You can have a nasty accident if you’re not careful,” says Neville Bramwell, a consultant at Deloitte. “We had a conversation with a CEO and asked if he knew what his PIP was and he didn’t – it turned out it was the worst one.”
Even those savers who earn less than 130,000 – and have not faced any restrictions on how much they can pay into a pension in the past two years – can be at risk of a tax charge because of their PIP.
In general, these people have been advised to contribute as much as possible to their pensions by April 5 – as the annual allowance for this tax year is 255,000. However, if their current PIP extends beyond April 5 and into the 2011-12 tax year, their annual allowance will already be reduced to 50,000.
Bramwell recommends that high earners wait until April 6 to make new contributions to ensure they are not caught out.
Richard Harwood at Brewin Dolphin warns that anyone looking to pay large sums into their pension should also be aware of a change in the lifetime allowance. From April 2012, the cap on lifetime pension savings will be 1.5m, down from the current 1.8m. Anyone who saves more than this will have to pay 55 per cent on the excess.
He says even those with 1m in their pension now – or far from retirement – should question whether they should pay in any more, in case they exceed the 1.5m limit, which is only calculated on the fund’s value at retirement.
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