The pensions earnings cap, set at £;105,600 for the 2005/06 tax year, ceases to be a control for limiting tax relief on pension schemes from 6 April 2006. It is replaced by two new controls, the annual allowance and the lifetime allowance.

The earnings cap, under the pre-April 2006 rules set out in the Income and Corporation Taxes Act 1988 (ICTA), serves two purposes:

1. In the case of an occupational pension scheme,
   
   
   • a pension may not exceed 1/60th of the employee's "final remuneration" for each year of service up to a maximum of 40 (ICTA 590(3)(a)), and.
     
     
   • a commutation lump sum may not exceed 3/80ths of the employee's "final remuneration" for each year of service up to a maximum of 40.
     
     

   An employee's "final remuneration" is limited to the amount of the earnings cap that applies in the tax year in which the employee's participation in the scheme ends.
   
   

2. Full tax relief is limited in a tax year to
   
   
   • in the case of an occupational pension scheme, the total of the employee's contributions up to a maximum of 15% of the employee's "remuneration" in a tax year
     
     
   • in the case of a personal pension scheme, the total of the employee's and employer's contributions up to a maximum of the higher of £;3600 and 17½% of the employee's "net relevant earnings" in a tax year, or a range of higher percentages if the employee is age 36 or over.
     
     

   In either case, the employee's "remuneration" or "net relevant earnings" in limited to the amount of the earnings cap for the tax year in question.

All of the tax relief limits in (2) disappear from 6 April 2006 and are replaced by the new annual allowance and lifetime allowance controls.

However, under newly-made Regulations that come into force from 6 April 2006, trustees of pension schemes that are subject to the limits in (1) may, for a transitional period, choose to retain the existing limits, including the earnings cap, where, otherwise, higher payments would be required under the new pension scheme rules and funds in the pension scheme would thereby be put under pressure. Payments made using the pre-April 2006 restrictions would not be treated, for the duration of the transitional period, as scheme chargeable payments under unauthorized payments rules.

The transitional period continues until the earlier of

• the date from which the pension scheme rules are changed so that the existing limits no longer apply, and
  
  
• the end of the 2010/11 tax year.

References: Income and Corporation Taxes Act 1988, sections 590(3)(a), 590(3)(d), 590C, 630(1), 638(3), 640 and 649A

...back to 23 February 2006


Source:
The Registered Pension Schemes (Unauthorised Payments by Existing Schemes) Regulations 2006
The Registered Pension Schemes (Modification of the Rules of Existing Schemes) Regulations 2006
Explanatory Memorandum

The UK Payroll News is sponsored by HRD & Payroll Solutions

Discuss this news item in the PayPerShop Forum

The following item is not directly payroll-related but is provided to clarify that, from April 2006, the payment to employees of social security pension lump sums will not have any impact on the taxation of their employment income.

The Pensions Act 2004 introduced a 'lump sum' option for individuals reaching State Pension age who opt to defer their taxable State Pension for at least one year from April 2005. The Finance (No. 2) Act 2005 requires such lump sums to be taxed at their marginal rate of tax, i.e. the rate that applies to their other sources of income.

The procedures will be followed to tax such lump sums has now been set out in the Income Tax (Pay As You Earn) (Amendment) Regulations 2006. They provide for the DWP to operate a withholding system on the lump sum - effectively a very simplified form of PAYE. DWP can deduct tax from the lump sum before payment is made on the basis of a declaration by the individual of the marginal rate of tax that should be used, i.e. the starting, basic or higher rate of tax. Where no declaration is made, the Regulations allow the DWP to deduct tax at the basic rate. The DWP must issue a certificate of deduction if the individual requests it. If it turns out that tax was deducted at too high a rate, the DWP may refund the excess during the same tax year.

The rules have been introduced to ensure that the lump sum does not form part of the person's total income. In the year in which the lump sum is received, it will not, in itself, affect the recipient's age related personal allowances or the rate of income tax chargeable on any other income.

...back to 16 February 2006


Source:
Explanatory Memorandum to The Income Tax (Pay As You Earn) (Amendment) Regulations 2006

The UK Payroll News is sponsored by HRD & Payroll Solutions

Discuss this news item in the PayPerShop Forum