Late last year new rules were announced relating to tax relief on pension contributions from 6 April 2011.

The 2011 Finance Bill, which includes these rules, is due to be enacted by late June/early July 2011, so partners have just a few short weeks to act in order to make the most of the changes.

The new rules include changes to the annual allowance (AA), which has been reduced to £50,000 with tax relief on contributions being available at the marginal rate of tax.

The rules also give the ability to carry forward unused AA for up to three years, as long as you had a pension policy in existence in the earlier years.

Furthermore, it is being deemed that the £50,000 AA will apply to 2008/09, 2009/10 and 2010/11 to determine any unused AA to bring into the new regime.

There is, therefore, an opportunity to catch up with additional contributions now with tax relief at current marginal rates.

However, there is a catch – the AA applies to contributions paid in a pension scheme’s Pension Input Period (PIP) which ends in the tax year.

The PIP may not be coterminous with the tax-year end.

Each pension scheme will have its own PIP, but they are not currently in the habit of advising policyholders of the year-end date. If you would like to find this out, the administrator will be able to confirm the PIP year-end date for a policy.

If the PIP year-end date is 5 April, then this keeps the position simple, particularly if there are several pension policies in existence.

However, when considering making contributions to utilise carry forward of unused pension relief, it is very complex if there are different PIP year-end dates for policies.

A few examples will help illustrate this:

Example 1

  • Mr Butcher is earning more than £200k
  • PIP date is 5 April 2012
  • Pension contribution of £50,000 made on 1 October 2011
The pension contribution will receive tax relief at 50% in 2011/12 and completely utilises the AA in respect of 2011/12.

Example 2

  • Mr Baker is earning more than £200k
  • PIP date is 30 September 2011
  • Pension contribution of £50,000 made on 1 October 2011

The pension contribution will receive tax relief at 50% in 2011/12 and completely utilises the AA in respect of tax year 2012/13 (as the contribution is into a PIP period ending on 30 September 2012 in 2012/13).

Example 3

  • Mr Candlestickmaker is earning more than £250k
  • PIP date for a pension policy 1 is 5 April
  • PIP date for pension policy 2 is 30 September
  • Under the new rules there is unused pension relief from 2008/09 brought forward of £50,000
  • Pension contributions are made as follows:
    • o Policy 1 - £30,000 made on 31 March 2012o Policy 2 - £20,000 made on 30 September 2011o Policy 2 - £50,000 made on 31 March 2012
The pension contributions will receive higher rate tax relief in 2011/12 on £100,000 and utilise the AA in respect of tax year 2011/12 (payments into policy 1 and first payment into policy 2) and 2012/13 (second payment into policy 2).

The unused AA from 2008/09 will not be utilised and will be lost.

If, however, the PIP year-end date for policy 2 was changed to 5 April then the position would be different.

The AA for 2011/12 and the unused pension relief brought forward from earlier years would all be fully utilised.

The AA in respect of 2012/13 would still be available to utilise in the tax year ending 5 April 2013.

Higher rate tax relief is still due on the £100,000 in 2011/12.

Changing the PIP year-end date

If you want to simplify your pension planning, you currently have a brief opportunity to retrospectively nominate for the PIP date for all your policies to be 5 April. (If you or the pension company have already changed the PIP year-end date to a date other than the 5 April, this will not be possible.)

Until the 2011 Finance Bill receives royal assent (anticipated to be late June/early July), it is possible to nominate retrospectively a change to the PIP year-end date all the way back to when PIPs were introduced in 2006/07.

To do this, simply send a nomination to the administrator of the scheme.

Once the Bill is enacted you will not be able to nominate a change to the PIP year-end date retrospectively.

Thereafter, a change to a PIP date can only be affected in advance of the existing PIP date occurring and the following rules are also met:

  • The policy can only have one PIP year ending in any tax year;
  • A policy’s PIP can only be changed once in a tax year.
    • Louis Baker is head of professional practices group at Crowe Clark Whitehill