1. Basic planning to reduce marginal rates of tax

The Personal Allowance is lost when earnings equal £114,950

Since 2010/2011, a 50% rate of tax now applies to individuals with taxable income in excess of a higher rate limit of £150,000 per annum. In addition to increased rates of income tax for high earners, those with an ‘adjusted net income’ in excess of £100,000 have witnessed their basic personal allowance reduced or removed entirely since 6 April 2010.

There will be a loss of £1 in personal allowance for every £2 of income earned over £100,000. The personal allowance is lost when earnings exceed £114,949 (the personal allowance for 2011/2012 is £7,475) – giving an effective 60% tax bill on this band of income.

Looked at another way this is a 20% increase in tax on a band of £14,950. That is almost £250 extra tax every month

Example – 125% tax relief

Salary	£114,950	£114,950.00
Pension contribution (Net)	£0	(£14,950.00)
Personal Allowance	£0	£   7,475.00
Income Tax	£ 38,980.00	£ 32,252.50
National Insurance	£ 5,680.04	£   5,680.04
Net Disposable Income	£ 70,289.96	£ 62,067.46

As a result of making pension contributions totalling £14,950 in the year, net income falls by £8,222.50.

For a post-tax cost of £8,222.50 the gross pension payment is £18,687.50 (with basic rate tax relief added). In effect this is an uplift of 125%. Part of the reason for this is that the personal allowances are re-instated.

This also works for higher income levels however the uplift will be different.

2. Pension carry-forward

What are the pension annual allowance rules from 2011/12?

Although the basic annual allowance framework remains in place, there are some important changes to the rules from tax year 2011/12 onwards:

• The annual allowance from tax year 2011/12 is £50,000 (significantly lower than the previous £255,000). This will initially be a fixed amount, but may increase over the longer term.
• Unused annual allowance from the previous three tax years can be carried forward to offset excess provision in the current tax year.
• A variable annual allowance tax charge of up to 50% applies to pension provision above the annual allowance (not the fixed 40% charge that applied in tax years before 2011/12).

What are the pension annual allowance carry forward rules from 2011/12?

From tax year 2011/12, in some circumstances any unused annual allowance from the previous three tax years can be carried forward to the current tax year. This can allow pension payments valued above the standard annual allowance to be made in a tax year without triggering a tax charge.

The carry forward rules are intended to help people whose pension provision is normally within the annual allowance, but who have an unusually high level of pension savings in a tax year.

Carry forward and tax relie

Where unused annual allowance carried forward from an earlier tax year is being used up, the usual pension tax relief rules still apply to any contribution above the standard annual allowance:

• Tax relief only applies to personal contributions up to 100% of the individual’s relevant UK earnings for the current tax year; and
• Relief against corporation tax on employer contributions is subject to the usual wholly and exclusively test.

Example 1 – carry forward calculation

Hermione is a self-employed individual earning £200,000 a year. Over the years she has paid periodic large single contributions to a SIPP, but only paid £30,000 in 2009/10 and 2010/11 because of the impact of the special annual allowance rules for those years.

Now she is looking to take advantage of the carry forward rules in 2011/12 to catch-up on some of the missed pension provision. Her recent contribution history and carry forward calculation are as follows: –

Tax year	Pension Premium	Unused allowance	Cumulative carry forward available
2008/09	nil	£50,000	£50,000
2009/10	£30,000	£20,000	£70,000
2010/11	£30,000	£20,000	£90,000

This means that, on top of the standard £50,000 annual allowance, she could pay up to another £90,000 to the SIPP for 2011/12 without facing an annual allowance tax charge.

Example 2

Freya earns £80,000 a year and has already paid £50,000 to her SIPP to use up her annual allowance for the tax year 2011/12. She received a large inheritance and would like to make a further pension contribution to use up unused annual allowance from previous years.

Her history of pension funding for the previous three tax years and her carry forward calculation are as follows: –

Tax year	Pension Premium	Unused allowance	Cumulative carry forward available
2008/09	£10,000	£40,000	£40,000
2009/10	£70,000	(£20,000)	£20,000
2010/11	£15,000	£35,000	£55,000

The key point to note is that, because Freya’s contributions for 2009/10 were more than £50,000, this has used up some of her unused allowance from 2008/09.

She decides to pay a further £30,000 to her SIPP, giving her a total pension payment of £80,000 for tax year 2011/12 (the largest personal contribution she can obtain tax relief on). This will use up the £20,000 unused allowance remaining from 2008/09 plus £10,000 of the unused allowance from 2010/11, leaving £25,000 of unused allowance from 2010/11 available for future years.

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here.

Bill Herlihy, of Silver Levene provided research for this article.

Disclaimer

Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or umesh.modi@silverlevene.co.uk