Pension contributions are paid net of basic rate tax, and the pension provider recovers the tax element. Up to £3,600 per year (gross) may be invested by any individual irrespective of whether they have earnings to match it or not.
Pension contributions also save higher rate tax for those liable, and this relief is normally given through the self assessment return.
In 2009/10 restrictions on relief have been introduced for those with income of more than £130,000. The income limit applies to the tax year and the two preceding years, so if your income is only £40,000 in 2009/10 but was £200,000 in 2007/08 you are still affected by the new rules.
In general you will be able to pay in the same amount of pension contributions in 2009/10 and 2010/11 as you have previously, but if you have not made regular monthly or quarterly contributions you might incur a tax charge on contributions you pay annually.
Contributions paid by your company are also taken into account for this new legislation, so you should take specific advice before making pension contributions through your company if your income is above the limit. If your income is less than £130,000 in all of the relevant years, the company can pay up to the annual allowance of £245,000 without you incurring a tax charge.
There will be new rules again affecting pension contributions (including contributions by companies) in 2011, so the current regime will have a life of only two years. The 2011 regime has not yet been finalised but it is likely to include a tax charge on company contributions for those with income in excess of £130,000.
Tags: Pension contributions, Pensions, Personal tax return, tax planning
