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Personal Pension Contributions (PPCs)
Retirement Annuity Premiums (RAPs)
Maximum Contributions Allowable
Contributions towards a retirement pension are eligible for tax relief up to certain limits. The first rule is that the person must have some earned income usually from an employment or self-employment (sole trade or partnership). Personal pension contributions made by the self-employed (sole trade or partnership) will be paid gross. In rare cases, an employee may make gross contributions, if so, the pension contribution should be entered in the self-employed section. Employees will normally make net contributions.
Employees (or Directors) may be provided with a company pension. This in turn may be contributory or non-contributory. A contributory scheme will mean that part of the person's income is paid into the pension fund. No deduction may be claimed for this because the earned income (shown on the P60) will be net of the pension contributions.
Whether contributory or non-contributory, the person will not be able to make personal pension contributions in relation to the income from that employment. It is possible for them to make additional voluntary contributions (AVC) into the employer's scheme. If the AVCs are incorporated into the P60, no deduction should be made. If the person would prefer to have a personal pension, they must opt out of the employer's scheme.
The allowable deduction that may be claimed for personal pension contributions is restricted to a percentage of the person's net relevant earnings (NREs). This comprises:
Non-pensionable employment income.
Profits from trade, profession or vocation (less any losses)
Income from furnished holiday lettings (less any losses)
Some income from share options and shares acquired (where included in the P60 amount); and
Some other income (in IRIS this is type 1 from any other income or profits)
The percentage limit that applies will depend on the age of the person and whether personal pension contributions (PPCs) or retirement annuity premiums (RAPs) are made.
The percentage limit increases with age:
|
Age |
limit |
|
0 |
17.5% |
|
36 |
20% |
|
46 |
25% |
|
51 |
30% |
|
56 |
35% |
|
61 |
40% |
In 1998-89 (the first year that the personal pension scheme existed) a lower percentage limit applied, it was the same as the retirement annuity premium limits, shown lower down.
If the NREs exceed the following levels, they are capped at that level.
|
2005-06 |
£105,600 |
|
2004-05 |
£102,000 |
|
2003-04 |
£99,000 |
|
2002-03 |
£97,200 |
|
2001-02 |
£95,400 |
|
2000-01 |
£91,800 |
|
1999-00 |
£90,600 |
|
1998-99 |
£87,600 |
|
1997-98 |
£84,000 |
|
1996-97 |
£82,200 |
|
1995-96 |
£78,600 |
|
1994-95 |
£76,800 |
|
1993-94 |
£75,000 |
|
1992-93 |
£75,000 |
|
1991-92 |
£71,400 |
|
1990-91 |
£64,800 |
|
1989-90 |
£60,000 |
|
1988-89 |
no limit |
From 6th April 2006 contributions to registered schemes are not limited by reference to a fraction of earnings and there is no earnings cap. An individual may make unlimited contributions and tax relief is available on contributions up to the higher of:
The full amount of relevant earnings; or
£3,600 provided the scheme operates tax relief at source.
Employee's nearly always make their payments net and the deduction is given by extending the basic rate band by the gross amount. The self-employed will make gross contributions and gross deduction is made in the tax computation. The allowable deduction may be restricted to the maximum allowable, see below.
From 2001-02 onwards all contributions are made net of basic rate tax.
RAPs are basically the same as personal pension contributions. They have been replaced by personal pension schemes. They can no longer be started but any contracts that were started prior to 1/7/88 will continue and still attract tax relief. The percentage limits for retirement annuity premiums are lower than those for personal pension schemes:
|
Age |
Limit |
|
0 |
17.5% |
|
51 |
20% |
|
56 |
22.5% |
|
61 |
27.5% |
There is no NRE cap for RAPs. Payments are made gross and a gross deduction is given in the tax computation. The allowable deduction may be restricted to the maximum allowable, see below.
The maximum contribution allowable requires a complex calculation based on the net relevant earnings and amounts paid over a number of years. The basic percentage limits for PPC and RAPs form part of this calculation. If the person pays less than the maximum possible in the year, the difference is stored as unused relief. If the person pays more than the maximum possible, the excess may still be allowed provided there is sufficient unused relief from an earlier year to cover the excess. Unused relief is stored for a maximum of six years, thereafter it is lost. The personal pension planner is used to compute the maximum contribution payable and this also covers the correlation of PPC and RAPs.
There is an overriding limit. The allowable pension contribution cannot exceed the net relevant earnings.
If the client pays more than the maximum allowable, the payment may still be made but the excess will not attract tax relief because it cannot be claimed as a deduction in the tax computation.
From 2001-02 onwards there is an automatic minimum level of £3,600 for personal pension schemes, this applies even if the client has no net relevant earnings. In addition the client can base the percentage on the best net relevant earnings in a six year period (the current year or any of the five earlier years). Retirement annuities remain under the older regime based purely on a percentage of NREs.
