Pension changes to Annual Allowance

olbas_oil

Apologies for what must be a very basic question, but I am getting very confused with the changes. I am in a defined benefits scheme, but also have a Sipp, to which I have been putting in the maximum contribution under the existing rules (relevant earnings less employer and employee contributions).

I have estimated the increase in pension benefits over the next year, and it is minimal (pay increase less than inflation - though I do have another year service). Multiplying by 19 (to account for the lump sum) leaves me with a higher unused annual alowance than my relevant earnings.

Am I still bound by the 100% of relevant earnings rule, or can I contribute up to the level of the unused annual allowance, and still reclaim tax? I have other income that can't be classed as relevant earnings, but I do pay tax on it.

JOHNGT

The carry forward has the effect of increasing the annual allowance for the current tax year. You have to use your £50000 for the input period ending in 2011/12 before you can carry forward unused relief from 2008/09, 2009/10 or 2010/11.

However, you can't contribute more than 100% of your earnings as a personal contribution. In other words, it is just like today when we have an annual allowance of £255,000. With carry forward, you could have an annual allowance of £200,000 in 2011/12 but you can only use that via personal contributions up to 100% of earnings.

The other income can't be counted if it is not earned.

The only time you can go over 100% is if your employer pays in on your behalf too. There is no limit on employer pension contributions - small business owners pay their pension contributions from the employer partly for this reason but it is also NI efficient.

olbas_oil

Thanks Johngt, for clarifying that it is still 100% of relevant earnings. In the past I have calculated this by taking my gross salary, working out net equivalent, taking off my contributions - and my employer's contributions - and regarding that figure as the ceiling I could pay into my SIPP.

Your reply suggests it was only my own contributions that count towards the 100%, and I could disregard the employer contributions. Would you mind confirming this? Is there any jargon free explanation on the web?

JOHNGT

The annual allowance of £50000 and the limit on your personal contributions are worked out independently.

Let's assume you earn £40,000 gross and are in a DB scheme with 1/80th pension plus 3/80ths cash. You have received no salary rise in the pension scheme year (input period) ending in 2011/12. You pay 6% gross into this scheme - £2400.

As far as personal contributions to the SIPP go you do not need to deduct contributions to the DB scheme paid by your employer, but you do need to deduct your own contributions. So, max SIPP personal contribution = £40,000 minus £2400 = £37,600.

As for the annual allowance, you need to take into account the value of your accrual in the DB (which includes the effect of yours and your employer's contributions).

The calculation is 1/80th of £40,000 = £500 x 16 = £8000 plus 3/80ths of £40,000 = £1500. So total value of accrual is £9500.

You can pay more than the annual allowance but there is a tax clawback if you exceed £50,000 so this is not advisable. Therefore, for the purpose of the annual allowance, you have headroom of £50,000 minus £9,500 = £41,500.

As your max personal contribution to the SIPP (£37,600) is within the balance of your annual allowance, you can happily pay £37,600 into a SIPP and get basic rate tax relief on the whole contribution, and no annual allowance tax charge.