Pension Schemes - Pensions earnings cap and the transitional period

Written by Ian Congreave - Filed under: Pension Schemes, Statutory and Other Payments and Deductions on February 4th, 2010

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Pension scheme trustees may continue to use the pensions earnings cap, which officially ceased to exist from 6 April 2006, for the purpose of restricting pension payments from a registered pension scheme for a transitional period. The transitional period ends on 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.

Although the earnings cap, fixed at £105,600 for 2004/05, has not been increased in legislation since April 2006, HMRC continues to review it annually for these transitional purposes. The notional value of the pensions earnings cap for 2009/10, £123,600, is unchanged for 2010/11.

As this is the last year for which HMRC will publish a notional cap figure, schemes that wish to know what the earnings cap would have been in future will have to use the calculation method provided in section 590C of the Income and Corporation Taxes Act 1988. This is a problem as that section did not appear in the original Act. It was added by means of the Finance Act 1989, amended by the Finance Act 1993 and repealed in 2004!

However, we have tracked it down and the notional earnings cap figure for each new tax year is calculated as follows:

If the retail price index (RPI) for the month of September prior to the new tax year is higher than it was for the previous September, the earnings cap figure for the previous tax year is
- increased by the same percentage as the year-on-year increase in the RPI, and,
- if the result is not a multiple of £600, it is rounded up to the nearest multiple of £600.
If the RPI has not increased year-on-year, the earnings cap figure stays the same.

Examples:

The earnings cap figure for 2008/09 was £117,600. The increase in the RPI at September 2008 was 5.0%. Applying that increase to £117,600 takes it to £123,480 and this is then rounded up to £123,600, the next higher multiple of £600.
The earnings cap figure for 2009/10 was £123,600. The RPI for September 2009 decreased year-on-year by -1.4%. In this situation, the figure does not decrease but remains the same.

Further information:

Pension Schemes: Notional Earnings Cap 2010-11