Annual Allowance Charge
The annual allowance is not an upper limit for claiming tax relief on pension contributions.
You can claim tax relief on gross pension contributions up to £3,600 or 100% of your earnings, whichever is the greater, even if your gross pension contribution is above the annual allowance.
If you make contributions above the annual allowance, you will still get tax relief for contributions above the limit, but you will have to pay the annual allowance charge, which rather defeats the object.
Triggering the Annual Allowance Charge - example:
Say, in the year 2009/2010, your earnings are £400,000. You make a gross pension contribution of 100% of your earnings and claim tax relief on the entire £400,000 contribution. However, as your contribution exceeds that year's annual allowance of £245,000 you will have to pay tax of £62,000.
(£400,000 - £245,000 x 40%). (For simplicity, this example assumes no other pension provision.)
Change the pension input period - avoid paying the annual allowance charge:By changing the pension input period, the above tax charge could have been avoided completely. |
Causes of the annual allowance being exceeded:
The annual allowance can be exceeded by virtue of pension contributions made by you or your employer or by increases in the value of any current or preserved final salary benefits or by any combination of these elements. Contact us for advice if you think you may exceed the allowance.
