HMRC Pension Tax Relief Changes

On Thursday 14 October 2010 HMRC released its document on proposed changes to the UK’s pension regime. Back in June 2010, the new Coalition Government confirmed that it would continue with the previous Government’s plans to raise tax revenues by restricting pension tax relief from April 2011. However, the new Government wanted to impose their own ideas and indicated that the previously announced changes would come under review, particularly in terms of the complexity being proposed.

The core aspects of the Government’s decisions are as follows:

The Annual Allowance (AA)

The Annual Allowance is the maximum amount of pension contribution that is allowable for tax relief and is currently £255,000 for 2010/11. The new proposals will reduce this to £50,000 from April 2011. As now, contributions will qualify for tax relief at your highest rate of Income Tax, 20%, 40% or even 50%. Interestingly, the new proposals have reintroduced a carry forward facility whereby unused relief from up to three previous years can be rolled forward and used in the current year of contribution. For example, in 2011 if you have not used any previous contribution allowance, you will be able to make a contribution of £200,000 (3 x £50,000 from 2008/09 to 2010/11 plus 2011/12 allowance) and obtain tax relief at your highest rate.

The Lifetime Allowance (LTA)

The Lifetime Allowance limits the amount of pensions that can be built up over your lifetime. Currently, the Lifetime Allowance is £1.8 million for 2010/11. The new proposals will reduce this to £1.5 million but the change has been deferred until 6 April 2012.

There are various provisions already in place for transitional protection and no doubt further, lengthy provisions will be introduced for those who are at or already over the old limit.

Who Is Affected?

The proposals will affect you if you currently contribute into any pension arrangement or someone else, for example, your employer does so on your behalf. However, given that the contribution level and limits have been set reasonably high, it is unlikely to affect more than a small proportion of pension contributors at any particular time. Where it may have some impact is in special situations, such as redundancy or early retirement where larger pension contributions may be made and will now be subject to the new conditions. It is not only Personal Pension schemes which are affected but Final Salary arrangements are also included. The new £50,000 limit which, for Final Salary Schemes, translates into a pension benefit increase of just £3,125 per annum may be problematic for some but the carry forward provisions should help to address the situation.

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