Pension Schemes - Frequently Asked Questions

 

Contributions

Contributions By Members Of Occupational Schemes

Q. What is the maximum amount the Inland Revenue will let me contribute to my pension scheme?

A. The maximum employee contribution (Contractual, AVC & FSAVC) that can be made in any one Tax Year cannot exceed 15% of remuneration. This may be further restricted if you are a high earner who joined the scheme after 1989, has elected to be treated as a member who joined the scheme after 1989 or your benefits are fully funded (please see question regarding Earnings Cap). If you are unsure whether you are such a member please contact your scheme administrator or pension department.


Q. Can I use my redundancy payment to make an additional contribution to my pension scheme?

A. If the Inspector of Taxes agrees that the payment is assessable under Schedule E, it may be possible for an arrangement to be entered into with the employer which allows the payment, or part of it, to be paid as an employer's contribution to the scheme. This amount must be actuarially justified and allowable under the scheme rules. However once the payment has been made to the employee this option is no longer available.


Q. Contributions made by an employee have proved to be excessive. Do we put the amount of the refund down on form 1 (SF)?

A. If the contributions were made in error (i.e. they inadvertently exceeded the 15% limit or were made as a result of a direct debit not being cancelled in time), then the refunds would not go on form 1 (SF). They should be refunded to the employees and the relevant Inspector of Taxes notified in order that the employee's Schedule E tax position can be adjusted accordingly.


Contributions to a Personal Pension Scheme

Q. If a person's earnings are below the tax threshold, can they claim relief on their personal pension contributions?

A. Prior to 6 April 2001 all employed earners, but not the self-employed, paid their contributions net of tax and qualified for tax relief on their contributions in this way. This applied even if they were not paying any tax. From 6 April 2001, this method of payment was extended to the self-employed, so everyone now gets tax relief on their contributions even if their earnings are below the tax threshold. People who are not employed but who are eligible to contribute also receive tax relief at basic rate on their contributions, even if they are not taxpayers.


Q. If I am eligible to contribute in excess of the earnings threshold (i.e. £3,600 in tax year 2002/2003), from which date does the age-related maximum in respect of my personal pension scheme contributions increase?

A. The percentage limit on the amount of your personal pension contributions is dependent on your age at the commencement of the tax year to which the contributions relate, i.e. on the 6th April. The contributions payable in each tax year are as follows:

Age 35 or less 17.5%
36 - 45 20%
46 - 50 25%
51 - 55 30%
56 - 60 35%
61 or more 40%

Q. What is the current earnings cap (or "permitted maximum")?

A. For the tax year 2003-04 it is £99,000
  For the tax year 2004-05 it is £102,000
  For the tax year 2005-06 it is £105,600


Q. I have been a member of a personal pension scheme for several years but have not been making the maximum contributions which I could have. Is it possible for me to now make up for the shortfall?

A. Due to the abolition of carry forward of unused relief from 6 April 2001, it is no longer possible for carry back to be combined with carry forward after 31 January 2001.

But it is still possible for a member to carry back a contribution to the previous tax year, providing they pay the contribution before 31 January and make a claim to carry that contribution back no later than the time the contribution is paid.


Q. As an employer how do I make contributions to my employees' personal pension schemes?

A. As an employer, you would simply make a gross payment to the appropriate provider. You then claim tax relief through your accounts in respect of the payment. Contributions made by an employer to an approved personal pension scheme do not count as taxable pay of the employee concerned. You do not therefore have to deduct tax or N.I. contributions from the payment.

Some employers collect their employees' personal contributions and pass them over to the pension provider on their behalf. The tax position is quite different for these contributions. Employees get tax relief through a special relief at source system (similar to the old MIRAS system for mortgage relief). Tax and NIC is deducted from gross income in the normal way (under PAYE). The employee (or an employer acting as his agent) then pays a net contributions to the pension provider, who claims back basic rate tax from the Inland Revenue and credits it to the personal pension plan.

For example, an employee wishing to pay £100 a month gross will actually pay £78 a month (for the tax year 2002/2003) from his net pay. The provider will credit the plan with a further £22, i.e. an amount equal to the basic rate of tax, to bring the total contribution up to £100.


Q. As an employer I have been using net pay arrangements to give tax relief on my employees' personal pension scheme contributions through the payroll. Is this correct?

A. No. The net pay arrangement is a system under which individuals obtain tax relief on contributions paid to occupational pension schemes. Unlike in a personal pension (see answer to question above), the contribution is deducted from pay before tax, and is thus a gross contribution. This system is not appropriate and must not be used in conjunction with personal pension schemes because this would result in relief being given twice (see answer to question above). All employee contributions to a personal pension or stakeholder pension should be paid out of net income after deduction of PAYE & NIC. Where the net pay arrangement has been operated incorrectly, the employer's tax office should be contacted immediately to rectify the matter.


Q. I want to contribute towards personal pensions for my children. Can I do this and will I get tax relief on the contributions I make?

A. As from 6 April 2001, scheme administrators may accept a payment from another individual on behalf of a scheme member, subject to the contribution limit applicable to the member.. Where the scheme member is a child, the child's legal guardian must be aware of the payment. The payments you make to your child's personal pension qualify for the addition of tax relief in your child's pension account at the rate applicable to the child, as if the child had made the contribution him/herself. You yourself are not entitled to any tax relief on these payments.

For advice on the treatment of such payments for Inheritance Tax purposes, please consult the webpages of Inland Revenue (Capital Taxes) from Offices on the Inland Revenue homepage.


Q. I have chosen a basis year that I understand applies for the purposes of net relevant earnings for contributions to my personal pension for that year and the five following years. Does the earnings cap in the basis year apply throughout this period or will my contributions be subject to any increased earnings cap in those years?

A. When a tax year, in which net relevant earnings are above the cap, is chosen as a basis year, the net relevant earnings would be limited to the earnings cap in that actual basis year itself. However, in the subsequent 5 years, if the earnings cap has increased, and your net relevant earnings from the basis year still exceed this new figure, the amount of contributions that can be made n these particular years will now be limited by reference to the earnings cap in that subsequent tax year.

The age related % is still applied according to the member's actual age on 6 April in the tax year the contribution relates to.


Q. I require form PP43(New) to carry back. Is it available on the Internet?

A. Yes.


Q. I cannot afford to fully contribute up to the earnings threshold (£3,600) in this year. Can I carry back a contribution next year to make use of the unused relief available?

A. Yes. You must however make the contribution by 31 January in a tax year, and your claim to carry that contribution back to the previous tax year must be made before, or at the same time as, the contribution is actually paid.

Contributions to a Public Sector Scheme

Q. How Much Money Can I Pay Into my Scheme Each Year?

A. Members' contributions (basic plus any Additional Voluntary Contributions (AVCs), Free Standing Additional Voluntary Contributions (FSAVCs) and contributions to purchase added years) should not (normally) exceed 15% of their earnings for the tax year in which the contributions are paid - Para 21(1) Schedule 6 Finance Act 1989. Although this legislation does not apply to statutory schemes we nevertheless encourage them to observe the 15% limit. Most statutory schemes co-operate on this, and some have even embodied the limit in their regulations.

The only situation where the limit does apply to statutory schemes is when a member is paying AVCs. As the AVC scheme is approved the 15% limit applies to the aggregate of AVCs and all contributions to the main scheme in the same tax year. Any AVCs in excess of the 15% limit would have to be refunded.

In the context of approved schemes, the contribution cap can be ignored where:

  • a (pre-1989) member makes a lump sum contribution on retirement to increase benefits up to the maximum allowed by the scheme rules, or
  • a member is obliged by the scheme rules (as at March 1989) to make good a shortfall in contributions by paying a lump sum contribution.

Although a member's contributions may exceed 15% of earnings in the above circumstances, the 15% limit on tax relief still applies.

 

 

Q. I am having a contribution deducted from my retirement lump sum. When is this contribution deemed to have been "paid"?

A. The date a contribution is paid can be important, particularly when it is near the end of a tax year. We have to decide if the contribution is effectively paid on the date of retirement or the date the authorisation was actually given which can be earlier. A contribution paid in the year of retirement when there are earnings would attract relief (subject to the normal 15% limit) whereas a contribution paid in the following year when there are no earnings would not.

A solicitor's opinion has advised that if the scheme rules require a contribution to be deducted from a member's lump sum retirement benefit, the contribution is effectively paid on the date of retirement. This is because the member's entitlement to the lump sum benefit is reduced by the amount of the obligatory contribution.

But where a deduction from a lump sum is voluntary the member's entitlement to the full lump sum benefit remains until the scheme has been authorised to deduct the contribution. In this situation the contribution is paid for tax purposes on the date when that authority is given.

Q. I have been paying into my scheme's 'in - house' Additional Voluntary Contribution (AVC) arrangement for a few years but the pension it will give me will be very small. Can I have the money back, or alternatively can I transfer it into the main scheme and use it to buy added years?

A. Your AVC fund cannot be treated in isolation. You can only have the money back if you have been in both the AVC scheme and the main scheme for less than two years. It is not sufficient to simply have been in the AVC scheme for less than two years.

The same applies to commutation on the grounds of triviality. The benefits from the AVC scheme must be added to what you are getting from the main scheme and only if the total of the two together produces a pension of £260 per annum or less, is commutation on triviality grounds possible.

It is not possible to transfer the money into the main scheme either as this would automatically give a lump sum which is not acceptable as the benefits from the AVC fund can only be in pension form.

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