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Pension Input Periods

Contributions

Personal Contributions

There is no limit on the amount that can be contributed to your pension schemes, only a limit on the amount that is eligible for tax relief.  The limit each tax year is the greater of £3,600 or 100% of UK relevant earnings for the respective tax year.

UK relevant earnings includes employment income, income which is chargeable under Schedule D and is immediately derived from the carrying on or exercise of a trade, profession or vocation (whether individually or as a partner acting personally in a partnership and income to which section 529 of Income and Corporation Taxes Act 1988 (ICTA) (patent income of an individual in respect of inventions) applies.

Personal contributions are paid net into the scheme so when considering this limit, be sure to take into account Liberty will reclaim from HMRC basic tax on your behalf which will be paid directly into the SIPP account.  (Therefore, when considering what you can actually put into the scheme, the limit is the greater of £2,808 or £78% of UK relevant earnings for the respective tax year up until 2007/08 or £2,880 or £80% of UK relevant earnings from 6th April 2008 onwards.)

Currently, personal pension contributions are relievable at your higher margin of tax.  If you are making contributions on behalf of a dependent, such as your child, the limit will be £3,600.  If you are a higher rate tax payer, no further tax can be reclaimed.  Where contributions are paid that exceed the tax relievable amount, the excess will not be entitled to any tax relief.

Company Contributions

There is no limit on company contributions that can be made and qualify for corporation tax relief as contributions are treated for tax purposes as a business expense.  Where contributions are being made for controlling directors or connected parties, the amount may be challenged by the local tax inspector if the amount is not considered to be in line with what would have been provided for an unconnected employee.

Annual Allowance

At the end of each tax year, contributions are tested against the annual allowance.  The Government has allowed for an increase of £10,000 each year until 2010.  Further increases may be allowed for after this date, but none have been announced.  The annual allowances up to 2010 are:

• 2007-2008: £225,000
• 2008-2009: £235,000
• 2009-2010: £245,000
• 2010-2011: £255,000

The annual allowance limit applicable is decided by the end date of the pension input period.

It is logical to assume that the limit on tax relief for personal contributions is tested against earnings in the respective tax year, the annual allowance limit applicable would also be for the respective tax year.  However, this is not the case.  Not all contributions paid in the tax year are included in the annual allowance test, only contributions paid during a set period (the pension input period).

For this to make more sense, you need to look at the annual allowance test and the maximum tax relievable contribution test separately. 

There is no annual allowance test against contributions paid to the scheme in the year the whole funds are crystallised.

Pension Input Periods

The pension input period starts when a contribution is first made to the SIPP and the first period will automatically run for 12 months and 1 day and subsequent periods for 12 months.  However, a nomination can be made by you to end the period earlier, so long as in each tax year there is a period end date. 

The tax year in which the period ends, the relevant annual allowance limit applies.  Contributions made during this period must remain within this limit to avoid a charge being levied by HMRC on you, the member.

Why would you want to change your input period?

• coincide with a company year end
• coincide with the tax year end
• to “double up” in one tax year
• to avoid an annual allowance charge being levied

Example

On 1st April 2008, a personal contribution of £300,000 is paid into the SIPP.  Therefore, the first pension input period will automatically be set to run for 12 months (1st April 2008 to 1st April 2009).  As 1st April 2009 falls into the tax year 2008/09, the contributions paid in this period would need to fall within the annual allowance for 2008/09, £235,000.  A higher rate tax payer would reclaim 18% tax on the contribution in the 2007/08 Return (as the contribution was paid in the tax year 2007/08).

However, earnings for 2007/08 are anticipated to be significantly higher than the annual allowance (£500,000) and much lower in 2008/09.  Therefore, it would be preferable to contribute more than the annual allowance, but still benefit from full tax relief.  This can be achieved by nominating to end the pension input period earlier; for this example we’ll nominate the period to end 3rd April 2008.

A contribution of £225,000 could be made up to 3rd April 2008 (the annual allowance for 2007/08) and a further £235,000 on 4th April 2008 (the start of your second input period, hence the annual allowance for 2008/09).  The total contributions made in the tax year 2007/08 is £460,000 and as earnings were sufficient to justify the contributions, full tax relief would be claimed. 

Only one pension input period can fall in any one tax year.

Are pension input periods applicable to occupational schemes?

The annual allowance test is carried out on all registered pension schemes.  However, the company can defer allocating contributions once paid into the scheme to a specific member unless there is a crystallisation event.  (Corporation tax relief may still be applied for in the year in which the company paid the contribution to the scheme, but is only included in the annual allowance test when allocated to a member.)

This is advantageous if the annual allowance would be exceeded if the contribution was allocated.

Example

There is a SSAS scheme with four members.  On 30th September 2007, (the company’s year end) the company makes a contribution to the scheme of £800,000 which was immediately allocated equally between the four members.  On 30th March 2008, each member makes a personal contribution of £60,000.  Assuming there are no nominations to the contrary, the pension input periods for all the members will run from 30th September 2007 to 30th September 2008 and hence the annual allowance is £235,000 (2008/09 limit).  This would mean the annual allowance is exceeded by each member by £25,000 (£200,000 company contribution and £60,000 personal contribution) and as a result the members would be liable to an annual allowance charge.

To avoid this, the company could allocate £150,000 to each member immediately, and after 30th September 2008 (after the first input period has ended) allocate the remaining £200,000.  The company could still apply for corporate tax for the company year ending 30th September 2007, but there would be no annual allowance charge on the members.

How does it work if I’m contributing to several arrangements?

The annual allowance limits are tested on all contributions made within the relevant “periods”.  It is not essential to have all your periods ending on the same date, but you will need to fully understand the implications on personal tax relievable limits and annual allowances if you are to avoid HMRC charges.

Example

You are a member of three schemes of which contributions are being made to all:

1. An occupational scheme with monthly contributions of £5,000 employee and £7,500 employer commencing from 1st January 2007 and a single employer contributions of £30,000 allocated to you on 30th June 2007
2. A personal pension where a single personal contribution of £30,000 was made on 1st May 2007
3. Another personal pension where monthly contributions of £3,500 are being made with effect from 1st October 2006.

In April 2008, the contributions which would be included for the test would be for periods ending in the tax year 2007/08

(SP = Single Premium)

£13,000 would be liable for an annual allowance tax charge.  To avoid any charge, you would want the contributions total to fall within the £225,000 limit (annual allowance for 2007/08), A nomination to end the input period for Scheme 3 on 30th Jul 2007, the contributions included in the 2007/08 charge would achieve this:

The 2007/08 Tax Return would include the following:

To qualify for full tax relief on these contributions, UK relevant earnings of £132,000 would be needed in the tax year 2007/08.