Queries on the Annual Allowance

Not surprisingly, the recent Budget announcements triggered a rush of queries from Aries members as to how the new rules will operate. At the time of writing, we are still waiting for some of the dust to settle here, so it is perhaps a little early for me to go into some of the issues that have been raised. Instead, for this article, I will look at some recent queries concerning one element of the A-Day regime that will continue to apply: the Annual Allowance.

Contribution confusion

One point that crops up fairly often (especially as we approach the end of the tax year) concerns the difference between:

- the maximum contribution that an individual can make to a registered pension scheme and on which they can claim tax relief, and

- what counts towards their Pension Input Amount under a money purchase arrangement.

Whilst, intuitively, it might seem that these are the same thing, this is not necessarily the case.

The maximum pension contribution that an individual can make in a tax year, and on which they can claim tax relief (the ‘annual limit for relief’), is specified in Section 190 of the Finance Act 2004 (and is reflected in the PTM) as being the greater of:

- the individual’s ‘relevant UK earnings’ for the tax year, and

- ￡3,600 (known as ‘the basic amount’).

This does not prevent an individual from making a contribution that exceeds these limits – it is just that they would not be able to claim tax relief on anything over the appropriate limit. 

For the purposes of an individual’s Pension Input Amount under a money purchase arrangement, however, this is based on the total ‘relievable pension contributions’ paid in by or on behalf of the individual for the tax year, plus any contributions paid in by the employer (see Section 233 of the Finance Act 2004).

The term ‘relievable pension contributions’ is defined in Section 188 of the Finance Act 2004 as being any contributions paid by or on behalf of the individual other than:

- any contributions paid after the individual has reached the age of 75,

- any contributions which are life assurance premium contributions,

- any contributions paid by an employer of the individual.

This means that it is possible for an individual to make a contribution that exceeds the maximum amount on which they can claim tax relief (i.e. a contribution that exceeds the greater of their relevant UK earnings for the tax year and the basic amount) and yet for (part of) that contribution to still be a relievable pension contribution and so count towards their Pension Input Amount under a money purchase arrangement.

HMRC acknowledge this possibility in the PTM, however I have a lot of sympathy with an administrator who is trying to explain to a member that, even though they did not qualify for tax relief on part of their contribution, that contribution is still a relievable pension contribution for Pension Input Amount purposes. It is easy to see how this could be a source of confusion.  

I am on a one-man campaign to have the term ‘relievable pension contribution’ amended to ‘potentially relievable pension contribution’ (meaning that tax relief would be available on it, if the individual has sufficient relevant UK earnings to support that contribution). So far, however, HMRC have been unresponsive to this and, right now, they have far bigger fish to fry.

Backdated Pay Rises

One query that was recently raised with me concerned a member of a Defined Benefit scheme, who had just been awarded a backdated pay rise, going back six years. This, in turn, increases the individual’s ‘pensionable salary’ for those years.

The question here was whether the scheme needs to recalculate the individual’s Pension Input Amount for all of the affected years, based on the revised salaries involved?

Fortunately, I was able to confirm that HMRC’s position on this point is “no”. As HMRC explain in the PTM, where a backdated pay rise is awarded, the increase in the value of a member’s DB benefits that occurs as a result is deemed to arise in the tax year in which the increased salary is actually put into payment. As HMRC say, “Where the salary increase is awarded at a date falling within one pension input period (the current pension input period) but has backdated effect to a previous pension input period the effect of the salary increase is included in the current pension input period and not in the previous pension input period.”

This is good news from the scheme’s perspective, as they will not need to re-work the previous Pension Input Amounts, with all of the associated complications that could involve.

Aries Insight provides comprehensive and detailed guidance on the application of the Annual Allowance rules, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants. If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that we are not lawyers or financial advisers. The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.