Speculation has been rife in recent weeks that tax relief on pension contributions could take a hit in the budget next week.
Partners urgently need to consider that it could be a quid pro quo for a reduction in the 50% rate - and if so, when it might come into effect.
High-earning taxpayers should take steps now to use up their brought forward pension contribution capacity with the benefit of 50% tax relief. To be on the safe side, you must make your contribution by 20 March in order to avoid losing out substantially on budget day if any changes are made with immediate effect.
By way of background, for 2011/12 there is an overall limit of £50,000 (before any tax relief at source) on all pensions contributions, subject to any available relief not used in the previous three years. To reduce your 2011/12 income tax liability, partners must pay pensions contributions by 5 April this tax year (under current legislation) but should consider paying by 20 March (the day before the budget) in case any change to the position is introduced with immediate effect.
You may be able to make pension contributions in 2011/12 of more than £50,000 because although the basic maximum annual contribution is £50,000, taxpayers can carry forward unused contribution limits for up to three years. The limits for the three years immediately prior to 6 April 2011 will be deemed to have been £50,000 per annum (with any amounts already paid in excess of these amounts ignored). Therefore, partners whose contributions were, say, £20,000 in 2008/09, 2009/10 and 2010/11 may be able to pay a total of £140,000 in 2011/12 and obtain income tax relief at their highest tax rate (provided they have sufficient earnings).
But beware of an important hidden detail - the annual allowance applies to contributions paid in a pension scheme’s pension input period (PIP), which ends in the tax year.
Each of your pension arrangements will have its own PIP and its annual period may not be 5 April each year. If they have different end dates, this could cause problems, the immediate concern being that your scheme PIP that ends in 2011/12 may have already ended!
If you don’t know your PIP, best to find out before determining your contributions, particularly if you are looking to use your three-year brought forward capacity.
Louis Baker is head of the professional practices group at Crowe Clark Whitehill
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