There is something called the Annual Allowance which is the maximum pension contribution that an individual and employer can make into a pension. The size of this annual allowance has been reduced from £40,000 to £10,000 for those earning over £210,000 a year.
Lets assume Dave’s salary is in the middle of these figures – £180,000 and his employer puts in a 10% Employers salary and Dave puts in 5% – he is effectively making an £27,000 annual pension. This will not affect Dave immediately however when it comes to January in the following tax year its time to do his Self Assessment, he will then not be able to claim all the extra tax on his pension.
So you work it out like this – £ 180,000 – £150,000 = £30,000 divide by 2 = £15,000. Therefore the annual allowance will drop from £40,000-£15,000 = £25,000.
In this rough example Dave would have normally received 20% at source on the contribution of £27,000 (£5,400) and then claimed back on Self Assessment an additional 25% (£6,750) making a total tax break of £12,150 for his £27,000 contribution. However under the new rules he will only receive 45% on the £25,000 i.e. £11,250. This equates to a loss of tax relief of £1,100.
However there is a way in which you can claim extra pension contributions and this is by making sure you’ve used up your previous allowances by using a Carry Forward Calculator. The Prudential have a good one which can be found at the following link http://www.pruadviser.co.uk/content/57818/354015/annual_allowance_calculator/
If you would like us to help you with any of this information then please call us on 01753 668831 or email email@example.com.
[This is Giles Warren’s interpretations of the rules. E&OE]