Finance Act 2011 enshrines changes to allowances in law

The Finance Act 2011 includes a radical shake-up of the system of allowances, which limit the amount of tax-efficient savings in a registered pension scheme.

The act, which received royal assent this week, reduced the annual allowance from £255,000 to £50,000 with effect from 6 April this year.

Employees are protected against the annual allowance charges if they make use of new carry forward provisions and spread one-off spikes in accrual over unused allowance in the last three tax years. In the case where members look likely to exceed the annual allowance on a regular basis as a result of high earnings or long service, they can smooth pensionable pay and accruals to ensure the tax charges do not bite.

Claire Carey, partner at Sacker and Partners, said: “Aiming off the annual allowance is not as simple as it might sound, with careful communication needed so that individuals wishing to go down this route understand exactly what benefits they may be giving up in return.

“Anyone engaged in such an exercise also needs to beware the potential ‘heffalump’ trap, in the form of anti-avoidance provisions built into the act designed to prevent benefits being manipulated to avoid the payment of tax properly due.”

The lifetime allowance, currently £1.8 million, will be cut back to its original A-Day level of £1.5 million from 6 April 2012.

Recognising that some individuals have already built up pension savings in the expectation that the lifetime allowance would remain at its current level, the act includes a new protection regime.

Pension savers will be able to apply for fixed protection by 5 April 2012, enabling them to keep a lifetime allowance of £1.8 million.

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