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Annual Allowance

What are the pension annual allowance rules from 2011?
Although the basic annual allowance framework remains in place, there are some important changes to the rules from tax year 2011/12 onwards:

  • The annual allowance from tax year 2011/12 is £50,000, but is reducing to 40,000 from April 2014 (significantly lower than the previous £255,000). This is initially a fixed amount, but may increase over the longer term.
  • Unused annual allowance from the previous three tax years can be carried forward to offset excess provision in the current tax year.
  • The value of defined benefit increases is calculated using a factor of 16:1 (rather than the previous 10:1 basis) for testing against the annual allowance. To help balance this, the opening benefit value is increased in line with CPI before the year's pension input is valued.
  • A variable annual allowance tax charge of up to 50% applies to pension provision above the annual allowance.
  • There are only exemptions from the annual allowance test on death, serious ill-health or severe ill-health.
Carry forward and tax relief
Where unused annual allowance is being carried forward, the usual tax relief rules still apply to any contributions made.
  • Tax relief on employer contributions is subject to the usual wholly and exclusively test; and
  • Tax relief on personal contributions is limited to 100% of the individual's relevant UK earnings for the current tax year (or £3,600 if greater).