The annual allowance for tax relief on pensions has been fixed at the current level of £40,000 since 6 April 2014. The previous allowance was £50,000 and prior to 6 April 2011, the annual allowance was as high as £255,000.

The annual allowance is further reduced for high earners. Those with income in excess of £150,000 will usually have their allowance tapered. For every complete £2 their income exceeds £150,000 the annual allowance is reduced by £1, up to a maximum reduction of £30,000 for individuals whose income is over £210,000.

The reduction in the annual allowance over recent years has meant that more and more taxpayers are exceeding their annual pension allowance and have tax to pay. Taxpayers will usually receive a statement from their pension provider telling them if they go above their annual allowance. This can be more complex if they have more than one pension scheme. Any additional tax due can be declared and paid as part of their Self Assessment. If the tax is more than £2,000 taxpayers can ask their pension scheme to pay the charge to HMRC from their pension pot. This means that their pension scheme benefits would be reduced.

Planning note

There are a number of ways to minimise any tax to pay. This can include:

• utilising the three year carry forward rule that allows taxpayers to carry forward unused annual allowance, and
• examining alternative savings strategies.

There is also a pensions lifetime allowance that should be monitored which is currently £1.03 million.

Employer contributions to any type of pension arrangement in a registered pension scheme are always paid gross. Tax relief is given by deducting the gross amount of the contributions from an employer’s taxable profits before Corporation Tax is calculated.

Employers’ contributions can normally be treated as a deduction for the accounting period in which the contribution is paid by the employer. The only exceptions are where the deduction is required to be spread over a number of periods or the deduction is allowed for an earlier period.

HMRC may require the tax relief to be spread over more than one period of account where there is an increase over 210% in the level of employer contribution from one period to the next. If the ‘spreading rules’ apply, the relief due to an employer on the making of a contribution to a registered pension scheme is not given entirely in the chargeable period in which the payment is made. Instead, part of the relief due is spread forward into future periods. This is a specialist area and advice should be taken before any payment is made.

Anyone aged 16 or over and at least 30 days from their State Pension age can request a State Pension statement from the Department for Work & Pensions (DWP). The statement provides an estimate of how much State Pension they can expect to receive when they reach State Pension age. The estimate is based on the applicant’s National Insurance Contribution record as it stands on the date the statement is produced.

An application can be made online, by post or by telephone. The statement is usually sent within 10 working days from the time the DWP receives the application. The statement also includes information explaining what effect further qualifying years may have on the amounts shown in the statement.

The statement includes the date the taxpayer will reach their State Pension age based on the current law. The State Pension age is regularly reviewed and may change in the future. The estimate does not take account of future payments.

Please note

If you do not have 10 qualifying years of contributions the statement will only tell you how many qualifying years you currently have. Taxpayers are usually required to make a minimum of 10 qualifying years to qualify for at least a part of their State Pension entitlement.

It is worth undertaking a regular check to help optimise your entitlement to the State Pension. You should also consider what other savings or pensions might be required to fund your retirement.

Following its annual review of the pension automatic enrolment earnings trigger and qualifying earnings band, the government has decided that the earnings trigger will again remain at £10,000 for 2018/19. The earnings trigger determines at what point an eligible person gets automatically enrolled by their employer into a workplace pension scheme.

 

The qualifying earnings band sets minimum contribution levels for money purchase schemes. The minimum of the band is also relevant for defining who can opt-in if they earn under the earnings trigger. The earnings band will continue to be aligned with National Insurance contribution rates, i.e. £6,032 for the lower limit of the qualifying earnings band and £46,350 for the upper limit.

 

The government also conducted a review of automatic enrolment during 2017 to explore ways that the policy could be further developed to encourage more people to save into a workplace pension and it has now published its report, “Automatic enrolment review 2017: Maintaining the momentum”. The report confirms the government’s intention to lower the age at which employers are required to auto-enrol employees into a workplace pension scheme from age 22 to age 18. It also sets out plans to change the framework so that pension contributions will be calculated from the first pound earned, rather than from the current lower earnings limit of £5,876 (rising to £6,032 for 2018/19). Removing the lower earnings limit would mean that everyone earning over £10,000 and under £45,000 a year (rising to £46,350 for 2018/19), and who meet the other eligibility rules, would be automatically enrolled by their employer and get pension contributions on eight per cent of all their earnings. Those earning at or below £10,000 would not be automatically enrolled; however, if they opt-in they would also benefit from pension contributions on 8 per cent of all their earnings.

 

The report predicts that this change would operate as an incentive to those with multiple jobs to opt-in to a workplace pension scheme, as they would benefit from an employer contribution for every pound they earn in every job, up to the upper earnings limit. The government intends that these changes will take effect in the mid-2020s, subject to discussions with stakeholders during 2018 and 2019 that will explore how to approach implementation.