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Input tax shock for small firms

Standard Life says small businesses could face crippling tax bills if they fail to take account of the pension input period when making big contributions, following reforms to higher-rate tax relief.

Last month, Treasury financial secretary Mark Hoban confirmed plans to cut the annual contribution allowance from £255,000 to £50,000 from April 2011. It also confirmed a cut in the lifetime allowance, from £1.8m to £1.5m.

Concerns were subsequen-tly raised over the failure to scrap the pension input period, the HMRC timescale used to calculate annual contributions which is not always aligned to a company’s tax year.

Under Treasury rules, if an individual’s input period ends next year they will be able to pay an extra £50,000 on top of what has already been paid into the pension up to October 14.

Standard Life head of pensions policy John Lawson says advisers will have to be “bang on top of this” ahead of the deadline or risk client claims of misadvice. Small firms, which often make large pension contributions during good years, could be particularly affected.

Lawson says: “There is a real need to get the input period right, because they are not always aligned with the tax year. It is complicated but this is a hugely important area for IFAs and if they get it wrong their clients could be chasing them up and down the street. There is certainly potential for misadvice claims if advisers are not careful.”

He says that a lot of one-person businesses deliberately pay themselves less than £130,000, the higher rate threshold, in order to make huge pension contributions through the business.

He adds: “You have got to be careful you do not go over for next year, because if you put a big lump in now and you cannot carry forward and use relief, you are snookered and you will face hefty charges.”

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