The government have changed the rules for pension contributions again, do you know what is happening?

You will have heard that the before the election the previous government was intending to limit the tax relief given on pension contributions for higher income taxpayers. The new government said it was going to review these rules as they thought they were too complex. The new rules were announced in mid October and apply from 2011/12.

The basic remains rule is that your personal pension contributions cannot exceed your £3,600 or your earnings, whichever is higher. For this purpose earnings are salary, bonus etc or profits from your own business.

There is then an ‘annual allowance’ which looks at the total contributions made by employee and employer – this limit is being reduced to £50,000. If you and your employer make contributions above this amount, you (personally) will be charged tax (at 20%, 40% or 50% depending on your income) on the excess. If you are a member of a defined benefit scheme HMRC look at the increase in the value of your accrued benefits to assess this £50,000 – this can be distorted if you are promoted and your salary increases significantly.

The lifetime allowance has also been reduced to £1.5m. If your ‘pension pot’ exceeds this amount when you start to take the benefits you will have to pay tax on the excess. This will be at 25% if you are taking income (the income is then taxable as you receive it) and 55% if you take a lump sum (no further tax).