Frequently Asked Questions (FAQ)

Contributions


What is the annual allowance?

How much is the annual allowance?

How is the increase in benefits valued when testing against the annual allowance?

Will the annual allowance increase in the future?

What is a pension input period?

Can a pension input period be changed?

Does a pension input period have to be the same as the tax year?

How much can be paid in a pension input period before an annual allowance charge must be paid?

Can unused annual allowance be carried forward?

Is there ever an exemption from the annual allowance charge?

What is the maximum pension contribution that the member is entitled to tax relief on if they have no earnings?

How much can be paid in for a child?

How much can an employed person pay to registered pension schemes?

Are member contributions paid gross or net?

What is the limit on AVCs?

Are AVCs paid gross or net?

Is it possible to carry back contributions?

Can member contributions be paid using shares or other assets?

Can somebody other than the member or the employer pay into the pension plan?

What is the maximum payment that an employer can pay for an employee?

Are employer contributions paid gross or net?

Can somebody be a member of an occupational scheme and a personal pension plan?

What tax relief is available on employer contributions?

What happens if an employer pays a contribution for a member that is more than the annual allowance?

What happens if the member pays more than 100% of their earnings?

Can tax relief be spread on member contributions?

Katie didnít pay the maximum tax relievable pension contribution she could have last tax year. Can she carry forward the unused tax relief to this tax year?

Fred earned £100,000 in the tax year during which he paid two single contributions of £30,000 each (gross) to his personal pension plan. He paid no other contributions. Will he get tax relief on his contributions?

Lynn is a member of a defined benefit pension scheme to which she paid £3,000 over the pension input period. Will the £3,000 plus the employer contribution count towards the annual allowance?

Can a partnership pay employer contributions?

Does pension income count as relevant UK earnings?

Weíve received a transfer payment from another scheme. Does the pension input period (PIP) start on the day we receive the transfer payment?

 

What is the annual allowance?

The annual allowance limits the amount of tax relievable pension savings that can be made by or on behalf of a member each year. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of a member's rights over the schemeís pension input period.

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How much is the annual allowance?

The annual allowance is currently £40,000.

The table below shows the annual allowance for previous years.

Tax Year

Annual Allowance

2006/07

£215,000

2007/08

£225,000

2008/09

£235,000

2009/10

£245,000

2010/11

£255,000

2011/12

£50,000

2012/13

£50,000

2013/14

£50,000

2014/15

£40,000



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How is the increase in benefits valued when testing against the annual allowance?

The annual allowance applies in total to all pension increases a member may have. The table below details how these increases are valued when testing against the annual allowance:

Type of benefit

Value of rights

Notes

Money purchase benefits

The total contributions paid in any input period, excluding age-related rebates.

This includes all member and employer contributions.

Type of benefit

Value of rights

Notes

Cash balance plans





The increase in the value of the member's rights over the pension input period.

When working out how much the benefits have increased by, increase the value of the plan at the beginning of the pension input period by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated. This is then compared with the value at the end of the period.

The rights to be valued will include partial benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.

Type of benefit

Value of rights

Notes

Defined benefits schemes









The increase in value of the individual's rights during the pension input period.

When working out how much the benefits have increased by, increase the annual pension amount at the beginning of the pension input period (this is the pension that the member would get if they retired now at normal pension age) and multiply it by 16. If the scheme also gives the member a lump sum in addition to the pension (i.e. not by commutation of pension), add this on. The total should then be increased by the increase in CPI over the 12 month period to the September before the start of the tax year in which the annual allowance is being calculated.

Deduct this amount from the value at the end of the pension input period; the end value shouldn't be increased by CPI.

The rights to be valued will include any benefits taken during the period, any rights transferred out to another registered pension scheme, and any pension debits. The value of any rights given on transfers in to the scheme and any pension credits can be excluded.



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Will the annual allowance increase in the future?

Any increases will be announced by the Treasury.

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What is a pension input period?

The pension input period is the period of time that is used to measure the value of contributions paid to calculate if an annual allowance charge is due. This does not have to be the same as a tax year and it is possible to change the dates. However new plans effected after 6 April 2011 will have a default end date of the first pension input period of the following 5 April. Subsequent pension input periods will be aligned with the tax year.

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Can a pension input period be changed?

It is possible to bring forward the date of the end of the input period as long as the input period does not end in the same tax year as a previous input period. Itís also possible to extend the pension input period beyond 12 months.

For a money purchase scheme that is not a cash balance arrangement, the scheme administrator or the scheme member can decide to end it sooner (or later). For any other type of scheme only the scheme administrator can decide this. This revised date is referred to as a nominated date.

Under a money purchase scheme if both the scheme administrator and the scheme member ask to make a nomination, then it is the nomination date of the first person to ask (which might not be the earlier of the dates nominated) that is used.

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Does a pension input period have to be the same as the tax year?

No, this does not have to be the same as a tax year. However schemes set up after 6 April 2011 will have pension input periods aligned with the tax year (unless changed).

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How much can be paid in a pension input period before an annual allowance charge must be paid?

If the amount paid in the pension input period exceeds the annual allowance for that year an annual allowance charge must be paid, unless there is an exemption or unused annual allowance to carry forward from previous pension input periods.

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Can unused annual allowance be carried forward?

Yes, unused annual allowance from pension input periods ending in the previous three tax years can be carried forward to the current pension input period. The annual allowance for pension input periods ending in the 2014/15 tax year is £40,000.

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Is there ever an exemption from the annual allowance charge?

Where a member dies, or takes a serious ill-health lump sum, no pension input amount will arise for the pension input period ending within that tax year.

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What is the maximum pension contribution that the member is entitled to tax relief on if they have no earnings?

The maximum amount is £3,600 p.a.

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How much can be paid in for a child?

Normally up to £3,600 p.a. (gross) can be paid if a child has no earnings. If they do have earnings over £3,600 up to 100% of those earnings can be paid and will benefit from tax relief. If the contribution is paid by a third party e.g. a parent, it would be the child that would benefit from the tax relief and not the parent.

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How much can an employed person pay to registered pension schemes?

There is no limit on the amount of contributions that somebody can pay to a registered pension scheme. UK residents get tax relief on contributions up to £3,600 or 100% of UK relevant earnings, each year, whichever is greater. More can be paid in but no tax relief will be given. Special rules apply to non-UK residents. Note that the annual allowance applies.

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Are member contributions paid gross or net?

Contributions by employed members to an occupational pension scheme can (but donít have to) be paid using the net pay arrangements. This means that the employer deducts the contribution before PAYE is applied, giving immediate tax relief at the employeeís highest rate of tax. For everybody else, contributions are paid net of basic rate tax by the employee. Basic rate tax relief is added to the contribution by the scheme administrator. The scheme administrator reclaims this amount from HMRC. If a person is eligible for higher rate tax relief they can reclaim this additional relief from HMRC using their self-assessment tax return form. Where a higher rate tax payer contributes to a plan for someone else such as a child, no higher rate tax relief is available to the person making the contribution. Note that although Retirement Annuity Contracts can accept contributions on a net of basic rate tax basis, most providers still require that they are paid gross.

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What is the limit on AVCs?

There is no limit on AVCs, other than what scheme rules permit and for tax relief purposes, the amount of relevant UK earnings and the annual allowance.

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Are AVCs paid gross or net?

They are paid in the same way as a member contribution. Contributions can (but donít have to) be paid using the net pay arrangements. Contributions could also be paid net of basic rate tax.

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Is it possible to carry back contributions?

No, carry back is not available.

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Can member contributions be paid using shares or other assets?

Yes, if the scheme rules allow it. A member may make a contribution by transferring shares into their pension scheme. This may be accepted provided the shares are eligible shares, that is, either:

  • if the member has acquired them through a Save As You Earn scheme, they are transferred into the scheme within 90 days of the member exercising the right to acquire them, or
  • if the shares have been part of a share incentive plan, they have been transferred to the scheme within 90 days of the member asking for the shares to be transferred to them.


The amount of the contribution will be the total market value of the shares.

Other assets (e.g. a property) can also be paid into the scheme Ďin specieí. In other words, the asset can be treated as a contribution without the need to convert the asset to cash. The valuation of the asset will be based on market rates.

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Can somebody other than the member or the employer pay into the pension plan?

Yes an individual, other than the employer or former employer, may contribute to a scheme on behalf of the member. Itís treated as if made by the member, so for tax relief to be given, it would have to be no more than the higher of £3,600 and 100% of relevant UK earnings.

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What is the maximum payment that an employer can pay for an employee?

Employer contributions qualify for full corporate tax relief, assuming that they meet the 'wholly and exclusively' requirements. Members are subject to a tax charge on the amount of any contribution (both member and employer) paid in excess of the annual allowance each year. Under a money-purchase scheme this is simply the value of the contributions paid in a pension input period. However, under a defined benefit or cash balance scheme it is the increase in the value of a member's rights over the pension input period.

Employer contributions benefit from full corporate tax relief in the accounting period in which they are paid but large single contributions (over £500,000) may have tax relief spread over a period of years.

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Are employer contributions paid gross or net?

They are paid gross.

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Can somebody be a member of an occupational scheme and a personal pension plan?

Yes, an individual can be a member of as many pension schemes of any type as they like. However tax relief on contributions will be restricted by the normal tax relief rules and the annual allowance. The tax advantaged benefits payable will be restricted by the lifetime allowance.

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What tax relief is available on employer contributions?

Employers can normally treat any pension contribution as a business expense and offset against corporation tax due, as long as the 'wholly and exclusively' rules are met.

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What happens if an employer pays a contribution for a member that is more than the annual allowance?

Members will be subject to a tax charge (annual allowance charge) on the amount of any contribution (both member and employer) paid in excess of the annual allowance each year.

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What happens if the member pays more than 100% of their earnings?

HMRC will re-claim any tax relief applied.

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Can tax relief be spread on member contributions?

No, only tax relief on employer contributions can be spread.

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Katie didnít pay the maximum tax relievable pension contribution she could have last tax year. Can she carry forward the unused tax relief to this tax year?

No, unused tax relief canít be carried forward from a previous tax year. What can be carried forward is any unused annual allowance from a previous pension input period. If the amount of contributions paid is more than the annual allowance available in the pension input period, any unused annual allowance from previous pension input periods can be carried forward to increase that yearís annual allowance. Katie can go back as far as pension input periods ending three tax years ago.

The annual allowance acts like a cap on the amount of tax relief that can be received. The tax relief is capped by imposing an annual allowance charge on any contribution over the annual allowance available for the pension input period. The charge is calculated using the memberís marginal rate of income tax, so itís designed to effectively remove the tax relief received on the contribution. This is done via Katieís tax return.

See our article on tax relief and the annual allowance for further details.

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Fred earned £100,000 in the tax year during which he paid two single contributions of £30,000 each (gross) to his personal pension plan. He paid no other contributions. Will he get tax relief on his contributions?

Yes, heíll get tax relief in the normal way as his earnings cover the gross contribution. Whether or not there will be an annual allowance charge depends on how the pension input periods run and whether or not there is unused annual allowance from previous years to carry forward.

If the pension input period ran from say 1 August to 31 July each year and he paid £30,000 on 1 June 2013 and the other £30,000 on 1 December 2013, there would be no annual allowance charge because the two contributions were paid in different pension input periods and each was within the annual allowance.

If £30,000 was paid on 1 September 2013 and the other £30,000 on 1 December 2013, both would have been paid in the same pension input period. Unless there was £20,000 of unused annual allowance to carry forward from previous years, there would be an annual allowance charge at his marginal rate on the £20,000 (£60,000 less the £40,000 annual allowance). This would effectively remove the tax relief.

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Lynn is a member of a defined benefit pension scheme to which she paid £3,000 over the pension input period. Will the £3,000 plus the employer contribution count towards the annual allowance?

No, for defined benefit schemes the employer contribution canít be assessed for each individual as itís an amount paid to the scheme, not each memberís Ďpotí, so contributions (including Lynnís) canít be used as the measure.

Instead, the value of the pension built up at the beginning of the pension input period is deducted from the value at the end of the pension input period and this is whatís measured against the annual allowance. A factor of 16 is used for valuation Ė details can be found in this article within the A pension input amount calculation for a defined benefit scheme section.

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Can a partnership pay employer contributions?

A partnership can pay employer contributions for those who are employees (e.g. administration staff). They can deduct those contributions from the partnershipís taxable profits.

The partners themselves arenít employees Ė theyíre self-employed. Any contributions are therefore member contributions.

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Does pension income count as relevant UK earnings?

No, it doesnít. Pension income is treated in the same way as investment income Ė it doesnít count as earnings. Only earnings such as salary, wages bonus, overtime, commission or self-employed earnings count.

See the RPSM for further details.

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Weíve received a transfer payment from another scheme. Does the pension input period (PIP) start on the day we receive the transfer payment?

No, the PIP starts with the payment of the first regular or single contribution. If we never receive a regular or single contribution, our plan will never have a PIP.

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