Tax relief on pension contributions

You should be aware of the terms below to work out if you’ll exceed the annual allowance limit:

Pension input period

Every pension plan has a pension input period (PIP). This is a period of up to 12 months that the government uses to measure your contributions against the annual allowance.

• You’ll be tested against the total contributions made during your PIP.
• You’ll be tested against the annual allowance for the tax year your PIP ends in.
• You may have a different PIP for every plan/scheme you invest in and you must consider the PIP for each of these.
• You should contact your financial adviser for more information on your plan’s PIP.
• If you’re a member of an occupational pension scheme, your scheme trustees will give you more information.

Pension input amount

The pension input amount (PIA) is the total pension contributions you build up during your PIP. If your contributions are more than the annual allowance, you’ll have to pay a tax charge. It is possible to carry forward any unused allowance from the previous three years and make contributions more than the annual allowance. If you want to you want to check your PIA, contact us for a contributions statement.

Whether the £50,000 limit applies to you will depend on what tax year your PIP ends in. Any contributions you make above the £50,000 allowance may incur a tax charge. If you’re contributing £50,000 or more you should get professional financial advice as soon as you can, as you may already be affected by the new limit.

Any contributions that exceed the annual allowance limit may incur a tax charge. However, from 6 April 2011, you are able to carry forward any unused annual allowance from the previous three years (up to an assumed limit of £50,000 a year). This will increase your annual allowance for the year.

The first three tax years that carry forward is available for are 2008/9, 2009/10 and 2010/11. You are able to carry forward unused annual allowance from a previous year only if you were a member of a registered pension scheme for that year. Carry forward can be used even if no contributions were made during that year to the registered pension scheme that you were a member of.

Take a look at this example.

John has total pension contributions of £65,000 for the tax year 2011 to 2012.

His previous contributions were:
2010 to 2011 £35,000
2009 to 2010 £30,000
2008 to 2009 £25,000

Based on a limit of £50,000 for each of the tax years 2008/9, 2009/10 and 2010/11, John has excess allowance he hasn’t used:

2010 to 2011 (£50,000 - £35,000) = £15,000
2009 to 2010 (£50,000 - £30,000) = £20,000
2008 to 2009 (£50,000 - £25,000) = £25,000

So his total unused allowance is: £60,000

John’s annual allowance limit for the tax year 2011/12

John has carried forward his unused £60,000 to give him a total allowance of £110,000 for 2011/12. The contributions of £65,000 are split as the maximum £50,000 annual allowance for 2011/12 plus £15,000 in carry forward contributions. Because his PIP increase in savings of £65,000 is less than this new allowance amount, he won’t incur a charge.

If, after carrying forward any unused allowance, your contributions are still more than your new annual allowance, you’ll incur a tax charge. You should get professional financial advice to discuss your options.

Your contributions will be tested against the limit for the tax year in which your PIP ends. If you want to change your PIP, you will need to write to us. We recommend you get professional financial advice first.