My fellow directors and I have had a good year and want to make big pension contributions to compensate for the leaner years. I have heard that changes have been introduced for this tax year which may affect the pensions of some of the directors and employees . We also have older staff in a final-salary scheme which is now closed to new entrants. What should we be aware of?
Many things announced in the 2011 Budget focused on changes affecting small businesses such as measures to reduce financial reporting and lessening the requirement to undertake audits but there were also pension changes.
There have not been any significant changes to the taxation of pensions since 2006 but this year’s Budget did bring in changes that those making big pension contributions need to be aware of.
The maximum amount that could be contributed to a pension known as the annual allowance has been £255,000 up to and including tax year 2010/11.
But from the start of the 2011/12 tax year, the annual allowance has been reduced to £50,000. This includes the contributions by the employee and employer.
I will need to check your high-earners’ pension input periods which normally last for a year (pension schemes can have a different Pip that may end in 2011/12 but began earlier than this tax year) to ensure they do not exceed the £50,000 annual allowance.
If they do, any gross contribution in excess of the annual allowance will be taxed at the individual’s highest rate of tax.
However, this should not be a problem in future years as a carry-forward facility of the annual allowance has been introduced which means any unused annual allowance of up to £50,000 a year can be carried forward for the next three years.
Your older employees who are in the final-salary scheme will have a right to a guaranteed annual pension in retirement. There is a flat factor of 16 used to calculate their annual allowance as the contributions paid into defined-benefit schemes do not directly relate to the annual pension paid out.
Therefore, if the pension benefit paid in retirement was increased by say, £200 a month or £2,400 a year, this would be deemed to be worth £38,400 as a pension contribution for the annual allowance calculation.
The lifetime limit for this tax year is £1.8m and will reduce to £1.5m in 2012/13. This is the limit for the amount of money held within a pension fund that can receive tax relief.
If this amount is exceeded, it is taxed at 55 per cent if taken as a lump sum or 25 per cent if taken as pension income.
At retirement, the requirement to buy a pension income at 75 has been removed from this year. Instead, pension benefits can be drawn down capped to a level of 100 per cent of the equivalent annuity that could have been bought.
Employees who have more than £20,000 a year in pension income guaranteed from any secure sources such as their state pension and occupational pension will be able to have unrestricted access to draw down their pension fund as income as they wish.
There are other changes introduced to pensions this year and it may be best if I deal with individuals separately as most people’s retirement provision is different and needs client-specific advice.
Kim North is managing director of Technology & Technical