The previous government had announced complex plans to gradually reduce the tax relief available on pension contributions over £20,000 per annum to 20% for those earning above £150,000 and paying tax at 50%.
The coalition government have now announced that these overly tortuous plans are to be abandoned but are to be replaced with drastic reductions to both the tax-free amounts that can be paid into a pension and the lifetime allowance for pension contributions.
The annual limit for contributions attracting tax relief will be reduced from £255,000 to £50,000 from April 2011 and the lifetime allowance on money that can be built up in a pension fund and receive tax relief will fall from £1.8m to £1.5m from April 2012. However those earning over £150,000 will be able to claim full tax relief, at 50%, on contributions of up to £50,000.
Where your employer also contributes to your pension these contributions will also count towards the annual limit or lifetime allowance.
If someone is fortunate enough to have long service in a final salary pension scheme you could also be caught by these rules as the increase in the value of your notional pension pot is calculated more aggressively. This could affect those in final salary schemes when their pensionable pay increases by more than £3,125. because the increase in pension contributions is calculated as sixteen times the increase in pensionable pay. The £3,125 could be reduced even further where the individual makes additional voluntary contributions but some relief may be due where the increases in the previous three years are below £50,000
These changes will be bad news for entrepreneurs and owner managed businesses where pension contributions are often based on the profitability in any year and the amounts contributed do not follow a regular pattern. There is however some limited assistance where unused contributions in one year can be used in subsequent years.
Any contributions exceeding the annual limit or the lifetime allowance will not benefit from tax relief. It will be up to individuals to navigate their way through these new rules when completing their tax return and, as always, we can help you through this process.
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