Pensions - the 2011/12 rules for the self-employed

In 2009/10 and 2010/11 we had a ceiling on the amount one could pay and obtain tax relief at the higher rate - the Special Annual Allowance Charge (SAAC) - with contributions above that, but less than the Annual Allowance (AA) scoring for basic rate relief, only. Many people took advantage of that, viewing the relief at 40% on the first £30,000 and 20% on the remainder as worthwhile.

The rules which apply from 6 April 2011 are different - the SAAC is no more, and the AA, previously standing at £255,000 has been reduced to £50,000. This is important because no tax relief at all is available for contributions in excess of the AA.

Relief capped at £50,000?

The Annual Allowance for 2011/12 is £50,000, but in recognition of the limits the previous rules put on some people and the fact that so many self-employed people do not have a steady supply of cash available for investment, there are rules which now allow an element of ‘catching up’. This operates by comparing contributions in the pension input periods (PIPs, typically but not always contemporaneous with the tax year) ending in each of the last three tax years with a notional AA of £50,000 and bringing forward unused AA to add to what might be paid and score for tax relief in the current year.

Stephen reviews his pension premiums in the PIP ended in 2008/9, 2009/10 and 2010/11. He paid £40,000 in his 2008/9 PIP, £60,000 in his 2009/10 PIP and £40,000 in his 2010/11 PIP. Stephen has to deduct the £10,000 excess for 2009/10 from the 2008/9 unused relief so he has only the £10,000 from 2010/11 to carry forward to 2011/12. He can therefore pay up to £60,000 in his 2011/12 PIP.

Mechanically, all this works by giving you tax relief on all the premiums paid in each tax year, then charging you ‘negative tax relief’ (the annual allowance charge) on the amount by which premiums exceed the annual allowance for the PIP ending in the year.

Where the annual allowance charge is more than £2,000 you can opt to have the scheme trustees pay it to HMRC for you - the charge will be payable immediately, recovered by the trustees by an adjustment to your fund/entitlement.

As you may guess, it’s not always straightforward so don’t hesitate to contact us if you have any questions.

Key questions:

• Are your pension input periods contemporaneous with the tax year?

• If not, should you change them? Leaving them as they are might give scope to maximise premiums in your year of retirement.

• With tax relief now limited to £50,000 of premiums for many, have you considered alternative retirement planning?