Pension savers can breathe easy again after Britain's pensions tax relief system was left intact by the government in the Autumn Statement. It was feared that George Osborne was ready to wield the axe on higher-rate tax relief to save the Treasury around £12bn a year.
But his restraint means savers can still get up to 50 per cent tax back – depending on their income bracket – on contributions into pension schemes. Tax is then paid on pension income in retirement, often at a lower rate.
Meanwhile, a new interpretation of the pension rules has opened up opportunities for pension investors to make significant contributions to their pension scheme this year.
HMRC has announced changes to its interpretation of the 'carry forward' rules, which allow investors to sweep up unused contribution allowances from the previous three tax years. The carry forward rules allow investors to make contributions in the current tax year where they have paid in less than £50,000 in any of the previous three tax years. Where no contributions have been paid in the previous three tax years, investors can now pay in up to an additional £150,000.
The previous interpretation of the rules meant that an investor who had contributed more than £50,000 in either 2009-10 or 2010-11 was deemed to have used up some of their annual allowance from earlier tax years, reducing the carry forward available to them now. The new interpretation means that the annual allowance from earlier tax years is not used up where the £50,000 limit has been exceeded in either 2009-10 or 2010-11.
This extra funding capability is great news, but is only available until the end of the current tax year. Also, it is restricted to pension arrangements with an input period ending in the 2011-12 tax year. A pension input period is driven by the date the first contribution is made into the pension and usually lasts 12 months. These dates are often different from tax year-end dates.
