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HMRC internal manual

Pensions Tax Manual

- Annual allowance: pension input amounts: annual allowance reduces during a pension input period

Glossary PTM000001
   

 

Pension input periods ending in the tax year 2011-12 that have started on or after 14 October 2010
Pension input amounts ending in the tax year 2011-12 that have started before 14 October 2010
Valuing pension input amounts for pension input periods starting before 14 October 2010 and ending in tax year 2011-12
Other money purchase arrangement
Defined benefits arrangements

Paragraph 28 Schedule 17 Finance Act 2011

There are transitional rules to cover the reduction of the annual allowance to £50,000 from £255,000 for 2011-12.

The transitional rules apply where the individual’s total pension input amount for 2011-12 exceeds £50,000 where the individual’s total pension input amount is valued in the same way for pension input amounts generally, as set out in PTM053100 onwards. The transitional rules apply only for pension input periods ending in 2011-12 that start before 14 October 2010. The transitional rules do not apply to any pension input period starting on or after 14 October 2010 and ending in 2011-12 and these have the annual allowance of £50,000 for 2011-12. See PTM052600 for the reason for having the transitional rules.

There are no transitional rules to cover the reduction of the annual allowance to £40,000 for 2014-15 as the reduced amount was known ahead of pension input periods that started in 2013-14 but would end in 2014-15.

Pension input periods ending in the tax year 2011-12 that have started on or after 14 October 2010

There are no transitional rules for pension input amounts for pension input periods that started in the tax year 2010-11 and ended in the tax year 2011-12 when the pension input period started on or after 14 October 2010.

The pension input amount for such a pension input period is valued in the same way for pension input amounts generally, as set out in PTM053100 onwards. Also the pension input amount is measured against the annual allowance for 2011-12 of £50,000.

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Pension input amounts ending in the tax year 2011-12 that have started before 14 October 2010

The maximum tax relievable pension savings a member can have in one or more arrangements that have a pension input period that started in the tax year 2010-11 at a date before 14 October 2010 and ended in 2011-12 is £255,000 - i.e. the pension input amount is measured against the annual allowance that was in place before the announcement was made to reduce the annual allowance to £50,000 for 2011-12.

However, the maximum tax relievable pension savings that the member could have made in such a pension input period from 14 October 2010 until the end of that pension input period is £50,000.

This will only apply for pension input periods ending in 2011-12 that started before 14 October 2010. Any pension input period starting on or after 14 October 2010 and ending in 2011-12 will have an annual allowance of £50,000 for 2011-12. However, the member can reduce the amount liable to an annual allowance charge if the member had unused annual allowance to carry forward from the three preceding tax years. PTM055200 has more details about carrying forward unused annual allowance.

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Valuing pension input amounts for pension input periods starting before 14 October 2010 and ending in tax year 2011-12

Pension saving made in an arrangement that has a pension input period that started before 14 October 2010 in 2010-11 and ended in 2011-12 is valued by splitting the pension input period into two ‘deemed’ pension input periods (the pension input period is not split permanently). One covers the period from the commencement of the pension input period to 13 October 2010 and the other covers the period from 14 October 2010 to the end of the pension input period.

The pension saving made in each of those notional pension input periods is calculated in the same way for calculating pension input amounts generally. PTM053100 onwards has more about calculating pension input amounts.

However, there is an exception if the arrangement is a defined benefits arrangement. Pension saving made in the period from the commencement of the pension input period to 13 October 2010 is valued using a factor of 10 instead of 16. The pension saving for the period covering 14 October 2010 to the end of the pension input amount is valued by the usual factor of 16.

In calculating the opening value for both these periods a full CPI increase is given.

The following examples show how these rules work.

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Other money purchase arrangement

Example

Alex saves £20,000 at the end of each month into her personal pension and she also makes a one-off contribution of £5,000 each February. Her pension input period is 1 June - 31 May.

For the pension input period ending in 2011-12 Alex’s pension savings amounts are calculated as follows:

* For the period 1 June 2010 - 13 October 2010 - regular contributions of £80,000.
* For the period 14 October 2010 - 31 May 2011 - regular contributions of £160,000 plus a one-off contribution of £5,000 - total contributions £165,000.

The annual allowance tax charge for 2011-12 for the pension input amount for the period ending 31 May 2011 would be worked out as follows:

* Period 1 June 2010 - 13 October 2010, pension input amount = £80,000
* Period 14 October 2010 - 31 May 2011, pension input amount = £165,000
* Total pension input amount = £245,000

The annual allowance for the whole pension input period is £255,000, but it is limited to £50,000 in the period 14 October 2010 to 31 May 2011. There is no annual allowance tax charge for the £80,000 pension contributions made up to 13 October 2010 as the total contributions in the pension input period (to that date) are not more than £205,000 (i.e. £255,000 minus £50,000 - £50,000 has been deducted from the £255,000 amount because the pension input amount for the period 14 October 2010 - 31 May 2011 is more than £50,000. If the pension input amount for that period is a lesser amount, that lesser amount would be deducted from £255,000).

For the period 14 October 2010 to 31 May 2011, the maximum annual allowance available is £50,000. So the excess contributions over £50,000 in the period 14 October 2010 to 31 May 2011 are liable to an annual allowance charge if Alex has no unused annual allowance to carry forward from the three earlier tax years.

Alex does not have any unused annual allowance to carry forward and there is an annual allowance charge on £115,000 (£165,000 - £50,000).

For guidance on when a contribution is paid, see PTM041000 and PTM053200.

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Defined benefits arrangements

Pension saving (the pension input amount) made in the period from the beginning of the pension input period to 13 October 2010 is calculated using a valuation factor of 10.

Pension saving made in the period from 14 October 2010 to the end of the pension input period is calculated using a valuation factor of 16.

The rate of pensionable pay at 13 October 2010 will be needed to calculate the pension input amount for both the period from the start of the pension input period up to 13 October 2010 and the period from 14 October 2010 to the end of the pension input period.

Example

Vito is a member of a final salary scheme and has 35 years pensionable service. This is Vito’s only pension saving.

His pension input period is 1 August to 31 July.

His scheme provides a pension of 1/80th final pay and a lump sum of 3/80th final pay for each year of service.

At 1 August 2010 his pensionable pay is £25,500.

On 13 October he has a pay rise and his pensionable pay increases to £30,000.

At the end of his pension input period (31 July 2011), his pensionable pay has risen to £35,000.

When valued in the same way for pension input amounts generally for pension input periods ending in 2011-12, Vito’s total pension input amount exceeds £50,000. (Following the calculation method in Example 2 in PTM053320, Vito’s pension input amount is £80,922.19.)

Because Vito’s current pension input period ends in 2011-12 but began before 14 October 2010, the value of Vito’s pension savings for the tax year are calculated using two ‘deemed’ pension input periods: 1 August 2010 - 13 October 2010 and 14 October 2010 to 31 July 2011.

Period 1 August 2010 - 13 October 2010 (74 days)

Opening value

35/80 × £25,500 × 10 = £111,562.50
   
3 × 35/80 × £25,500 = £33,468.75
  = £145,031.25

This amount is increased in line with CPI for the September prior to the beginning of the tax year, i.e. September 2010. For the purpose of this example the CPI has been taken as 3 per cent. So, in this case, the final opening value for the 1 August - 13 October 2010 period is £149,382.19 (£145,031.25 x 1.03).

The closing value at the end of the 1 August 2010 - 13 October 2010 period is:

 

(74/365 + 35)/80 × £30,000 × 10 = £132,010.30
   
(74/365 + 35) × 3/80 × £30,000 = £39,603.08
  = £171,613.38

The increase in pension input in the 1 August - 13 October 2010 period is £22,231.19 (£171,613.38 - £149,382.19)

This calculation is then repeated for the 14 October 2010 - 31 July period.

Period 14 October 2010 - 31 July 2011

Opening value:

(74/365 + 35)/80 × £30,000 × 16 = £211,216.48
   
(74/365 + 35) × 3/80 × £30,000 = £39,603.08
  = £250,819.56

Again, this amount is increased by CPI for September 2010, in this example 3 per cent, which brings the final opening value for the 14 October 2010 - 31 July 2011 period to £258,344.14 (£250,819.56 x 1.03).

The value at the end of the 14 October 2010 - 31 July 2011 period is:

36/80 × £35,000 × 16 = £252,000
   
36 × 3/80 × £35,000 = £47,250
  = £299,250

 The increase in pension input in the 14 October 2010 - 31 July 2011 period is £40,905.85 (£299,250 - £258,344.14)

Though Vito’s total pension input amount for 2011-12 exceeded £50,000, when valued in the same way for pension input amounts generally for pension input periods ending in 2011-12, the application of the transitional rules has meant that Vito has not exceeded the annual allowance for 2011-12. This is because his pension input amount, when calculated under the transitional rules, is less than £255,000 overall and his pension input amount for the period from 14 October 2010 until the end of the pension input period did not exceed £50,000.