Pension contributions

Produced by Tolley
Pension contributions

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Pension contributions
  • Advantages of registered pension funds
  • Maximum contributions
  • ‘Relevant earnings’
  • Annual allowance
  • MPAA
  • Pension input periods (PIPs)
  • Pension input amount (PIA)
  • Carry forward of annual allowances
  • Lifetime allowance
  • More...

Until 5 April 2006, there were three different pension regimes:

  1. company / occupational schemes

  2. personal pension schemes, and

  3. retirement annuity schemes

These schemes had different rules with regard to contributions that could be made and in respect of benefits that could be drawn on retirement.

The government brought in legislation in FA 2004 to abolish the existing rules and replace them with a single regime with effect from 6 April 2006. Tax approved registered schemes could carry on operating under their existing documentation until 5 April 2011, by which time the scheme rules had to be amended to comply with the new regime.

The guidance below covers only the new rules as they apply for the tax years 2006/07 onwards.

The tax treatment of pension contributions is complicated and has seen significant change in recent years. For more detailed information, please see the guidance in the Employment Taxes module starting with the Pension scheme types and / or the Personal Tax module Pensions glossary of terms and Tax relief for pension contributions guidance notes.

Advantages of registered pension funds

There are several advantages to using registered pension funds:

  1. pension funds do not pay income tax on interest / dividend income or CGT on capital gains generated from fund investments

  2. taxpayers can draw a tax free lump sum from the fund on retirement (normally up to 25% of the fund’s value)

  3. taxpayers receive a measure of tax relief on pension contributions which they make to their pension funds

  4. employer’s contributions into employee pension funds are allowable deductions from trading profits to the extent that they are wholly and exclusively for the purpose of the trade

  5. employer’s contributions into employee pension funds are a tax free benefit

For guidance on tax relief for employer contributions and non registered schemes, see ‘Employee tax relief for contributions’ below.

Maximum contributions

The maximum contribution to a pension fund that a taxpayer can obtain tax relief for in any one tax year is the higher of 100% of his

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