Tax hikes prompting rise in pensions contributions in UK

A sharp increase in pensions contributions in the wake of new HMRC statistics showing an expected 20% rise in the number of UK higher rate taxpayers this year is predicted.

The Government expects that the number of UK higher rate taxpayers will rise from 3.1 million in 2010/11 to 3.7 million in the 2011/12 financial year.

It is also expecting the number of additional rate taxpayers, those paying 50% tax, to increase from 246,000 to 275,000, a rise of nearly 12%.

According to Sipp provider A J Bell financial advisers and clients will recognise that one of the best ways to obtain relief against the higher and additional rates of tax is through pension contributions.
 
‘We've already seen a 170% increase in single contributions into our Sippdeal and Sippcentre accounts in the first month of the financial year compared with the same period last year,’ said marketing director Billy Mackay.

‘With the number of higher and additional rate taxpayers on the increase it is no surprise that many are planning their pension contributions carefully to reduce the tax that they pay. The level of contributions that someone can pay into their pension scheme is limited by the annual allowance,’ he added.

In 2010/11 the annual allowance was £255,000 but for those with relevant income of £130,000 or more a special annual allowance applied. The special annual allowance was introduced from 22 April 2009 and ranged from £20,000 to £30,000 for most higher earners which significantly limited their ability to pay contributions when compared to the pre-April 2009 position.

The Coalition Government simplified the rules so that from 6 April 2012 the annual allowance was reduced to £50,000 and the complex special annual allowance system was scrapped. The only annual allowance that applies now is £50,000.

Additionally, a carry forward option has been introduced. This allows individuals to use up unused annual allowance from the three previous tax years on top of their annual allowance for the current year. A default annual allowance of £50,000 has been set for the purposes of the earlier carry forward tax years. This means that it is possible for someone to pay up to £200,000 into a pension scheme this tax year.

‘Allowing pension investors to carry forward three years unused allowances is a positive and popular change as it introduces opportunities to effectively plan and maximise your pension contributions and the tax relief available to you,’ explained Mackay.