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30 June 2011
Pension Input Periods
What are pension input periods and how do they work?
Pension Input Periods were introduced from 6th April 2006 as an administrative easement for the new pension tax regime.
It is the end date of the pension input period which determines the tax year in which contributions are tested against the annual allowance. As the annual allowance has reduced from £255,000 to £50,000 this year, more individuals will need to take care as to when their pension contributions will be tested against the annual allowance.
A pension input period has, in the past, normally defaulted to a 12 month period chosen by the scheme administrator. The option exists for either the scheme administrator or, where the scheme administrator allows, the individual to choose when their pension input period ends by shortening that period. This facility to personally amend input periods only applies to individual plans and not occupational schemes.
No two pension input periods from the same pension arrangement can end in the same tax year, but provided they end in different tax years, they are assessed against the relevant tax year's annual allowance.
A change proposed in this year's Finance Bill will change the default on pension input periods to the tax year. Therefore any new scheme set up will have the input period running to the 5th April. This can still be amended and extended into the following tax year if required as long as the total period does not exceed 12 months.
Examples of the effect of pension input periods and when they determine the test against the annual allowance
For a pension input period running to the 5th April (i.e. from 6th April to 5th April) any contribution made in the tax year will be tested against the annual allowance in that tax year.
For a pension input period running from say 1st Jan to 31st December, any payment made in a tax year after 31st December will be tested against the following year's annual allowance.
The ability to make payments now which will be tested against the following year's allowance can be advantageous, for example:
Mr Smith has relevant earnings of £250,000 having had a substantial bonus in the year. He wishes to make a contribution of £100,000 to recoup the full level of the 50% tax charge. He does not have any unused contributions from previous tax years to carry forward.
His current pension plan has an input period running to the 5th April. He therefore makes a contribution of £50,000 to this plan. He then sets up another plan and whilst this will also default the pension input period to the 5th April he requests the administrator to amend this so that it finishes in the subsequent tax year.
This will mean that a further contribution of £50,000 can be made but that this will not be tested against the annual limit until the next tax year. In that way Mr Smith can make a contribution of £100,000 without exceeding the annual allowance.
Pension input runs 6th April to 5th April
Pension input period runs 1st January to 31st December
It should be noted that once the Finance Bill receives Royal Assent it will not be possible to retrospectively amend pension input periods so forward planning will always be necessary to ensure the effectiveness of this type of action.
If you would like to learn more, please speak to your usual contact at Towry.
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