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Update on pensions rules

5/ 8/2008

Q COULD you please let me know if there is any limit on the amount of pension contributions that can be made into a personal pension arrangement, and update me on the general rules which apply to employee and employer contributions under the current pensions regime?

A THERE is no limit on the level of pension contributions that can be made for any individual, but the nature of tax relief and tax penalties effectively create limits within the regime, as follows:

Contributions of up to £3,600 can be made for any individual under age 75, attracting basic rate income tax relief regardless of whether they are a taxpayer or their level of earnings.

Member contributions attract tax relief at the individual's marginal rate of tax, up to a level equal to 100 per cent of their earnings within a tax year.

There is no limit on employer contributions, and, providing they can be shown as having been incurred wholly and exclusively for the purpose of the business, they would usually attract Corporation Tax relief in the year of payment (although, if the contributions made by an employer, either directly or indirectly, exceed 210 per cent of their previous year's contributions, tax relief may be split over a period of up to four years). Where the total combined member and employer contributions exceed the annual allowance, the member would be subject to an annual allowance charge of 40 per cent of the excess contribution.

The 2008-2009 annual allowance is £235,000, rising to £255,000 by the 2010-2011 tax year.

In the tax year of retirement, no comparison is made between the contributions and the annual allowance. This means that contributions could exceed the annual allowance in that year without an annual allowance charge.