In a recent article, ‘Importance of Timing of Pension Contributions’, we outlined the important deadlines when considering pension planning. However, the timing of pension contributions may be complicated by the issue of Pension Input Periods (PIPs).
These come into play where a client may contribute or have contributed on their behalf via a company / employer: –
- regular but ad-hoc single premiums
- an amount in excess of the Annual Allowance.
PIPs are important as it is the level of contributions within that period that are measured against the Annual Allowance. As a result of changes in allowable contributions, we expect that more people need to give important consideration to PIPs. This is because with effect from 6th April 2011, the Annual Allowance was reduced to £50,000 per annum. The Government has announced that it will remain so until at least 2015/2016.
It is important to understand the PIP within which the contribution has been made as this will dictate within which tax year it will be treated as being paid and against which year’s Annual Allowance it will be measured.
Typically, a PIP commencing post 6th April 2011 begins on the day the pension provider receives the first contribution and lasts for a period of 12 months.
A client who paid their first pension premium on 6th April 2011 means the PIP will end on 5th April 2012 and any contributions will be measured against the Annual Allowance within the 2011/2012 tax year.
Another client who made a contribution on 7th April 2011 will result in the PIP ending on 6th April 2012, with the premium being assessed within the tax year 2012/2013 and that year’s Annual Allowance.
Chronologically and for purpose of claiming tax relief both clients’ contributions were within the 2011/2012 tax year but treated as two different tax years for the purpose of measuring against the Annual Allowance.
Please note that it is not always the case that the PIP is 12 months as some pension providers by default have synchronised their PIPs with the tax year.
An example of where this issue should be given important consideration is where an employer contributes on behalf of a key employee on 29th March 2012, just prior to their company year end of 30th March 2012. In the following trading year, more forward planning results in them making a further payment in good time, on this occasion in February 2013. As far as the company is concerned, these contributions are treated in two separate trading years. However, the individual may inadvertently exceed the Annual Allowance as both were made with the same PIP, i.e. 29th March 2012 – 28th March 2013, which will be measured against the Annual Allowance in the tax year 2012/2013.
Planning opportunities such as closing the PIP early or utilising the facility to carry forward unused Annual Allowances may be entertained to facilitate contributions in excess of the standard Annual Allowance. In regards to this latter point, we will be covering this opportunity in more detail in a future piece.
It should be emphasised that any personal contributions in excess of the new lower Annual Allowance will be taxed at the individual’s highest marginal rate to recoup the tax relief from which they have benefited. Employer contributions will be included in this assessment and added to other personal income to determine the marginal rate of tax charge.
In conclusion, timing is crucially important in pension planning and we recommend that you seek professional, independent financial advice on the matter as all may not be so straight forward as it seems.