Special Annual Allowance

Special Annual Allowance and Protected Pension Allowance

For most people, the maximum that can be paid each year into your pension fund is up to the annual allowance without penalty.  For high earners in excess of £130,000 per year, restrictions now apply, see £130K + Income rules and £150K + Income rules.

£20,000 Special Annual Allowance

• High earners can make individual pension contributions up to this limit without tax relief penalties and can claim maximum tax relief.
• Contributions in excess of £20,000 will be subject to the Special Annual Allowance Tax Charge.

How do I value my final salary Scheme Annual Allowance?
Final Salary Pension schemes are valued at a factor of 10 for annual allowance calculations (this increases to 16 in 2011). 

• For example if your projected pension entitlment increases by £1,000 pa due to a pay rise and/or another year of service credit then you will have used 10 X £1,000 = £10,000 Annual Pension Contribution Allowance used.  This means increases in final salary pension entitlement may trigger tax penalties or restrict how much you can pay into a pension elswhere. 
• Using the same example, if you pension entitlement increased by £2,000 pa then you will have used £2,000 X 10 = £2,000 of Annual Allowance and unless you have Protected Pension Input (see below) you may fae a tax charge if you have greater increases.

Protected Pension Contributions
If you were paying more than £20,000 before the Budget originally on 22 April 2009 or the Pre Budget 9 December 2009 then you have some protection against the Special Annual Allowance Tax Charge.  This is known as the Protected Input amount and includes:

• ‘Regular’ contributions paid monthly or quarterly
• Infrequent contributions such as yearly or half yearly lump sums where the average of the contributions made in three tax years 2006/07 to 2008/09 is used.
• The maximum ‘Protected Input Amount’ is £30,000.

This means the special annual allowance tax charge will only apply to pension contributions in excess of £20,000 Special Annual allowance or if you acquired a Protection Pension Contribution Alowance of the lower of £30,000 and the 3 year average.