Contributions and tax relief

Contribution Limits

There is no HMRC limit on the amount of contributions you can make or the number of pension schemes you can save in - although there are some limits on the amount of tax relief you can get.

Tax relief on Pension savings from 6 April 2011

The Annual Allowance (AA) is the amount you can pay into a pension before having to pay tax and is currently set at £50,000. Any pension accrued over a 12 month period that exceeds this £50,000 allowance will be taxed at your highest marginal rate.

The value of your pension savings in a tax year depends on whether your savings are defined contribution (like AVCs), or defined benefit (such as your main scheme retirement benefits). Each component is valued and then added together to see if the value exceeds £50,000. The benefits are valued as follows:

Defined benefit
This is the capital value of the increase in your pension and lump sum over the previous tax year. To arrive at the capital value of your pension it will be multiplied by a factor 16. This figure is then added to your lump sum.

Defined contribution
This is the amount of the contributions paid by you and BT (e.g. Smart Pensions, and bonus sacrifice where applicable) to the AVC funds. This amount is then added to the capital value of your defined benefits as calculated above.

You will receive tax relief on your pension savings at 20%, 40% or 50% as appropriate, up to the new Reduced Annual Allowance. This means that if you pay £100 the tax relief the Government gives you on that is worth £20 (£40 if you are a higher rate tax payer and £50 if you are an additional rate tax payer), making your net contribution £80 (£60 if you are a higher rate tax payer and £50 if you are an additional rate tax payer). Any pension savings above the Reduced Annual Allowance will be taxed as a benefit in kind with the tax collected under self assessment.

The government has announced that the Lifetime Allowance (LTA) will be reduced. LTA limits the total pension fund that you can accumulate in your lifetime before paying tax. Currently this limit is £1.8 million, but it will be reduced to £1.5 million from April 2012. You would be taxed at 55% if you exceed this amount, so it’s important to be aware of this if you think it might affect you.

Pension savings which began before 6 April 2011

The tax relief available on your AVC contributions paid in the 2010/2011 tax year depends on when you started or increased your AVC contributions and your income.

In general, you can contribute up to 100% of your earnings to registered pensions schemes and receive at least basic rate tax relief, currently 20% on those contributions, up to a maximum of £255,000 in the 2010/11 tax year.

If you are a higher rate (40%), or an additional rate tax payer (50%), you may be eligible to receive more tax relief but this will depend on your income from all sources in each tax year since 6 April 2007, and also when you started or increased your AVCs:

1. AVC contributions started before 22 April 2009

If you started paying AVC contributions before 22 April 2009 you would normally receive tax relief on your contributions at your marginal rate of tax (20%, 40% or 50% as appropriate). Any new or increase in contributions on or after that date would receive tax relief as under 2 or 3 below.


2. New AVC contributions started on or after 22 April 2009 but before 9 December 2009

The tax relief available on any new or increase in your AVC contributions depends on your income and the AVCs you pay.
 

Pre tax income from all sources below £150,000*

If you started paying AVCs, or last increased your AVCs between 22 April 2009 and 8 December 2009, and your pre-tax income in any of the tax years 2007/8 to 2010/11 was less than £150,000 you will receive tax relief at your marginal rate of tax. For example, if you pay AVCs of £100, the tax relief the Government gives you on that is worth £20 (£40 if you are a higher rate tax payer, and £50 if you are an additional rate tax payer), making your net contribution £80 (£60 and £50 as appropriate). This tax relief is given automatically and you need take no action to claim it.

Pre tax income from all sources of £150,000* or more

If you started paying AVCs, or last increased your AVCs between 22 April 2009 and 8 December 2009, and your pre tax income from all sources in any of the tax years 2007/8 to 2010/11 was £150,000* or more, you will initially receive tax relief on those new contributions at your marginal rate of tax, but you will be subject to a special tax charge known as the Special Annual Allowance. This charge will vary between 20% - 30%, so effectively reducing the tax relief on those contributions to 20%. This tax will be collected through self assessment.

*In determining whether your income from all sources has exceeded £150,000 the value of the increase in your pension and lump sum over the previous year is included, as is any pension contributions paid by you or BT to the pension scheme, including any salary sacrifice for pension purposes.

3. New AVC contributions started on or after 9 December 2009

The tax relief available on any new or increase in your AVC contributions depends on your income and the AVCs you pay.

If your total income, including income from investments and property etc, in any of the tax years since 6 April 2007 is £130,000 or more, then any new or increase in the AVCs you pay may be subject to a special tax (known as the Special Annual Allowance), which will effectively reduce the tax relief on those new or increased contributions to 20%. This additional tax will be collected through self assessment.

You will, however, receive tax relief at your marginal rate of tax on any pension savings up to £20,000 per year. Pension savings includes the increase in your pension over the previous tax year (multiplied by a factor of 10 to arrive at a capital value) plus the increase in the retirement lump sum.

The regulations affecting increases to pension savings are complex and the above is to be regarded as a simple guide and does not provide financial advice. You may wish to seek independent financial advice if your total income from all sources is in excess of £130,000 and you begin to make AVC contributions for the first time, or increase your existing AVC contributions.

Further details about the changes to tax relief are available on the HMRC website: http://www.hmrc.gov.uk/incometax/relief-pension.htm#4 and at http://www.hm-treasury.gov.uk/d/junebudget_restricting_pension.pdf

Frequent questions

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