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Personal Pension tax relief

The new rules for stakeholder pensions are now in force and these changes require each individual to adopt a basis year for earnings. This sets earnings at this level for five years (or until altered). Take this situation, a 42 year old individual has basis year (1999-2000) net relevant earnings of, say £50,000. During 2000-2001 actual NRE are only £40,000.

How much tax relief is available at 40%?
Is it based on £50,000 or £40,000? i.e. if maximum pension payments have been made of £7,800 net(£10,000 gross) what repayment would be generated?

Andrew M Stevens


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Relief is restricted by earlier NRE and current HR tax
Take a look at ICTA 1988, sec 646B: if the requisite evidence of earnings is provided, “it shall be presumed … that, for each of the five years of assessment following the basis year, … (… the member’s net relevant earnings) are the same as for the basis year.”

You should therefore be given relief on the basis of the higher figure. However, higher rate relief is given by sec 639(5A) by means of extending the basic rate band by the amount of the deductible contributions. To the extent that higher rate tax is otherwise due, it can be reduced this way.

If basis year NRE are £50k and the maximum contribution @ say 20% is £10k, but total taxable income in the current year includes only £5k chargeable at the higher rate, you get 22% relief at source on £10k and relief by repayment claim (PP120) or self-assessment for £5k @ 18%.

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For Jay
The figure of £3,600 is the maximum you can pay into a stakeholder freindly personal pension without having to prove your earnings. i.e. anyone can pay up to £2,808 (net of tax 22%) even if they dont have any NRE.

If you wish to contribute sums above this amount, the basis year selected (for which you must have proof of earnings)stands for 5 years. i.e. if a person has NRE of £50K, and the relevant age band percentage is 20% they can contribute £10K gross in that year and the next 5 years without having to prove their earnings.

Payments to the pension will be made with basic rate relief already given, the taxpayer can claim the 18% difference for higher rate tax relief.

What I am trying to find out, when you do the income tax calculation in following years where actual earnings are lower than those in the basis year, does the basis year earnings override the actual earnings for the purposes of detetmining tax repayments?

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"Stakeholder" is a red herring
£3,600 relates to any personal pension contribution. Stakeholder/stakeholder friendly are red herrings here (the latter being largely undefined anyway). They simply reflect a specific charging structure. The contribution rules/basis year/tax relief/etc etc relate to all personal pensions (as opposed to retirement annuities (old s226) regardless of their relationship to the stakeholder model.

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Have I missed something?
I presume the year in question is 2001/02 (2000/01 would have been dealt with under the old rules). In any event, the basis year is relevant only for determining the level of contributions available. The actual relief given must surely be based on actual earnings in the year of payment, eg contributions of £50,000 may be allowed based on an earlier, high NRE, year, but if earnings in the year of payment are only £20,000, I assume relief will be restricted to the basic rate tax deducted at source. Only where earnings exceed the higher rate threshhold in the year of payment would higher rate relief be given, up to the level of those earnings. Or have I missed something obvious?

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Basis year profits determine maximum
In your example, relief is based on basis year earnings of £50k - see booklet IR76, para 4.13.

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For David Heaton

Just a quick question. In Stakeholder pension can the tax payer contribute more than £3,600 or does he have to opt for Personal pension? The PM8 guide says: "You can invest up to £3,600 into your pension each year, no matter how much you earn."

It seems I need to learn the rules fast before I miss the boat!

Best regards,

Jay Tanna

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