Pension annual allowance charge

The annual allowance rules which took effect from 6 April 2011 lowered the maximum annual amount that an individual can contribute into his or her pension savings whilst benefiting from higher rate tax relief. The “annual allowance” was reduced from £255,000 to £50,000 from that date, including pension contributions made by an employee and the employer.

Thankfully, a “carry forward” facility was also put in place to provide for further relief where an individual’s own and his/her employer contributions were less than £50,000 in prior tax years (see our previous blog for more details).

However, one nasty quirk of the rules is that there is now no tax relief at all for amounts contributed in excess of the £50,000 (previously basic rate tax relief would at least have applied). A possible upshot of this is the potential for significant “dry” tax charges for individuals where their employer makes an unusually large payment into a plan, most obviously as part of a bonus or as “golden hello”.

Taxpayers and their employers should be alive to this possibility, but where a taxpayer has exceeded the annual allowance and the charge is more than £2,000, it is possible for the pension scheme to settle the annual allowance charge on behalf of the taxpayer.

Pensions remain a complex area, and it is important for both individuals and employer to make the most of the valuable tax relief on offer, whilst avoiding the potential pitfalls. If you would like to discuss the above or would like any other assistance please contact us for a consultation.