Tax & Accounting News
Starting a new pension plan now can boost tax relief on contributions
07/12/2011
Individuals can boost the annual limit for tax relief on pension contributions by bringing forward any unused limit from the previous three years and more.
In April this year the annual limit was cut from a maximum of £255,000 to £50,000, but there’s a secondary limit which can come into play at a much lower level.
The tax deductible annual limit for contributions is limited to the lesser of £50,000 and earnings.
If for example an individual opts for a tax efficient method of extracting profits from their company by taking a modest salary and large dividends, the tax deductable pension contributions are limited to the modest salary.
However, HMRC allows an annual maximum boost by adding the annual limit that hasn’t been used the previous three years.
PIP (Pension Input Period) rules state that any contributions paid into an existing plan count against the 2012/13 limit and not 2011/12, meaning that the unused limit can be accessed for 2009/10, 2010/11 and 2011/12, but not as far back as 2008/09.
Until 6 April 2011, the PIP for a pension plan ended on the anniversary of its start date. Contributions for annual allowance purposes are treated as paid on the last day of the PIP.
However new changes to the rules say that the first PIP for a new pension plan is now treated as ending on the last day of the tax year in which it was started.
This means that if a pension plan is started on or before 5 April 2012, premiums paid into the scheme will count against the annual limit for 2011/12 rather than 2012/13 as is the case for existing plans.
This means that one can access and bring forward unused pension limits from 2008/09 which otherwise would have fallen outside the previous three years.
