Pictured above: Sarah Moss

PKF Accountants & business advisers says that the pensions changes announced to cut back on the tax relief available to high earners in 2011/12, are a return to the long term status quo. The new rules will replace a horrendously complicated claw-back system already legislated in the Finance Act 2010 by the previous government. 

Sarah Moss, Partner of Private Client Tax Services at PKF, comments: "These rules will be simpler for most as the maximum pension contribution that you can pay and get tax relief on will be set at £50,000 and tax relief will be given at your top rate - not hugely different from the rules prior to 'A day' (6 April 2006). However, just like the last Chancellor, George Osborne could not resist introducing some transitional rules that take effect from today and will make matters very complicated for some individuals making large annual contributions." 

Under the new rules, from 2011/12, individuals will only get tax relief on annual pension contributions of up to £50,000 no matter how much larger their earnings are. This is a dramatic reduction from the current maximum annual allowance of £255,000. 

If an employer makes payments that take the total contributions for an individual over the £50,000 annual allowance, the employee will be hit with a penalty charge. This could particularly hurt individuals in defined benefit schemes where the employer's deemed contribution is calculated based on a multiple of the increase in the individual's pension entitlement during the year. Even worse, the multiplier used will increase from 10x currently used, to 16x from next year and employers will also face extra paperwork each year to give employees sufficient information to self-assess, whether or not a penalty charge is due.

The government predicts that up to 100,000 individuals could be hit by these plans and intends to consult on arrangements to allow penalty charges to be paid from the capital in individual's pension funds if they choose. 

Sarah Moss says: "Most individuals' personal pension contributions are less than £50,000 a year so they are unlikely to be affected. However high earners, middle income earners nearing retirement and those lucky enough to be members of defined benefit schemes, could face additional tax charges or be severely restricted in their options."

The lifetime limit for total value of an individual's tax-exempt pension pot is to be cut from £1.8 to £1.5m from April 2012. It is expected that those with pension pots of more than £1.5m already will not be penalised until they exceed the current £1.8m limit, though the government continues to consult on the rules needed to deal with individuals in these circumstances. 

Frank Williamson, Managing Director of PKF Financial Planning Limited says: "High earning individuals, particularly those nearing retirement, should investigate their options for making maximum contributions before 6 April 2011 to get the most into their pension pot while they can. As often happens, it is not until a benefit has been removed that we appreciate the real value of it. In recent years, pension funds have been subject to negative publicity, largely due to life expectancy and falling interest rates, when in fact they provide an excellent tax break for high earners and owner managers in particular .The anti-forestalling rules may limit their net tax relief to 20%, but that still means you have a final chance to get a maximum government subsidy of up to £51,000 this year.

"Owner managers should also now consider making large pension contributions through their company to get as much as possible into the tax-free environment of the pension fund before the lower annual allowance takes effect. The same applies to those in successful professional partnerships. I would advise individuals to seek advice sooner rather than later, as IFAs will be increasingly busy in the run up to 6 April 2011."

For more information about PKF, please visit their website here: www.pkf.co.uk