A Clearer Future Pension Scheme
As you may be aware in the current tax year 2010/11, the rules and tax reliefs surrounding pension contribution are a little bit difficult to explain quickly due to their horrendous complexity, although in short most people should be able to contribute at least £20,000 into a pension scheme and receive full tax relief on this at their prevailing rate of tax.
The good news is from April 2011, HM Treasury has recently announced that new legislation will be introduced which will simplify the tax law surrounding pension contributions greatly.
In essence, the new law will be as follows:
Each individual will be able to contribute up to £50,000 per annum into a pension scheme and these contributions can be made up of personal and/or employer contributions.
In addition, if that particular individual has not used their full contribution limits in the preceding three years (including 2008/09 through to 2010/11 for the purposes of 2011/12), these can also be carried forward to be used in the fourth year alongside that particular year’s contribution limit, enabling a contribution of up to £200,000 to be made every fourth year.
As relief will be given at the individual’s marginal rate of between 20% and 50%, planning with regards to pension contributions may prove to be extremely tax-efficient as if the significant contribution every four years is also in a high income year then full relief may be available at 50%.
For example, if you are a 50% taxpayer, and make the regular personal contribution of £50,000 per annum, your cash contribution would only need to equate to £40,000 (with the additional £10,000 coming from the government by way of basic rate tax relief at source), and your personal tax bill through self-assessment will be reduced by a further £15,000!
Alternatively if you decide to save up your contributions to a particularly high-earning year and then maximise the contribution of £200,000, then your cash contribution would need to be £160,000 (the other £40,000 coming from the government), with your self-assessment bill dropping by £60,000!
It should be noted here that whilst these rule changes were confirmed by HM Treasury on 14th October 2010, there will inevitably be more information to follow on these changes.
If you are already making contributions to a pension scheme, or are considering starting a scheme, we would recommend that you consider whether you should make any changes to your pension arrangements prior to 6th April 2011. If you would like to be introduced to an Independent Financial Adviser in order to discuss your pension options, then please contact one of our advisors.