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Min / Max Pension Contributions
With the advent of 'A' Day, after April 2006, the concept
of a 'Standard Lifetime Allowance' (SLA) was introduced.
This is a limit on how big your ‘pension pot’ can
be which will be assessed when you start drawing benefits
from the pension.
The SLA is set at £1.6 million for 2007/08, rising
evenly each year to £1.8 million in 2010. Increases
after April 2011 are expected to be in line with inflation
each year.
Pension schemes that are based on salary, rather than a
fund, are given an equivalent fund value based on £20
per £1 of income, so a future pension entitlement of £20,000
pa is deemed to be worth £400,000. However, if you
are already drawing a pension from a salary related scheme,
the equivalent fund value is based on £25 per £1
income, (on the basis that any tax free cash entitlement
has probably been taken in addition to the pension in payment).
While these may seem generous limits, a surprising number
of savers may be caught in the net. If your pension breaks
this limit, any excess will be taxed at 55%. There are protection
regimes in place to allow those with existing funds or schemes
that exceed the SLA to register with the Inland Revenue and
protect ‘surplus’ benefits over the SLA limits.
However, in deciding whether, how and which regime to register
under qualified and independent advice is invaluable.
The exceptional tax relief available within pensions is
extremely generous and the A Day changes have given massively
liberalised how much money you and your employer can contribute.
- A contribution, currently, of up to £3,600pa.
is permitted for everyone regardless of earnings. Even
for non taxpayers, this only costs £2,808 because
of the £792 tax relief paid directly by the Inland
Revenue into the pension. Higher Rate (40%) tax relief
of a further £648 is rebated to 40% taxpayers,
reducing the cost to £2,160.
- Employees and the self employed may pay up to the value
of 100% of earned income into pension up to the Annual
Allowance of £225,000 (2007/08) and claim full
tax relief! In the 12 months leading up to taking pension
benefits, the annual allowance may be ignored.
- The contribution to pension may come from savings rather than directly from income. With basic rate relief applying, someone earning £30,000 p.a could put £23,400 into their pension and have the Inland Revenue top this up with a £6,600 tax relief payment so that £30,000 actually goes into the pension.
- Higher Rate relief on the same £23,400 payment would mean an additional rebate of £5,400 paid back to the individual by the Inland Revenue.
- Employers may pay any amount into pension for employees, regardless of income.These pension contributions are an allowable business expense for tax purposes. Anyone employing their spouse, for instance, may make significant contributions to their pension and reduce their own tax by doing so.
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