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By Riyas Kallan, August 15, 2011

HMRC is changing the draft guidance based on the draft legislation published on 14 October 2010. This is important for individuals and pension scheme members so that they can understand the changes to the annual allowance and the effect that it might have on them.

From April 2011, the annual allowance for tax-relieved pension savings reduces from £255,000 to £50,000. To understand whether you are affected and if so, to what extent, you need to work out how much your pension savings are for a tax year. If they are more than £50,000 then you may be affected if your pension savings are regularly at this level. For ‘money purchase’ schemes, pension savings are the amount of cash paid in to your scheme for the tax year (including employer contributions for workplace schemes)

Important changes you need to know

• For the tax year 2011-12 the amount of the annual allowance will reduce to £50,000.
• The method of calculating the amount of pension saving (pension input amounts) for a defined benefits or cash balance arrangement has changed. There is no change in how you calculate the pension input amount for a money purchase arrangement.
• There will be a three year carry forward rule that allows you to carry forward unused annual allowance from the last three tax years if you have made pension savings in those years. This means if your pension saving is more than £50,000 you still may not have to pay the annual allowance charge.
• There will be no blanket exemption from the annual allowance in the year benefits are taken. There will however be an exemption in the case of serious ill health as well as death.
• From 6 April 2011 the exemption from the annual allowance for those with enhanced protection will no longer apply.
• The special annual allowance rules introduced in Finance Act 2009 will be repealed.

If you have any queries regarding your Annual Allowance please get in touch with one of our helpful staff members on 020 8761 8000 or email at info@taxfile.co.uk.