In the second part of a series, the David Aaron Partnership looks at the new defined contribution tax rules
Before 6 April 2001, if a person had not contributed the maximum permissible to a pension plan in any of the immediately preceding six tax years, paying a maximum contribution in the current year allowed them to pay further contributions in respect of this unused relief for these six years. (see case study: Alf)
The carry-back rules have been amended in respect of any contribution paid on or after 6 April 2001. Under the new rules, a contribution that is to be carried back to the previous tax year must be made by no later than 31 January following the end of the tax year to which it is to be carried back. The carry-back election must also be made no later than the date when the contribution to be carried back is paid. (see case studies: Sally and Andrea)
Another new rule permits a person to continue paying 'higher level contributions' for up to five tax years following the year in which he/she ceased to have relevant earnings. To do so however, they must not be a member of an occupational pension scheme or have any relevant earnings in those years.
In any event, a person can contribute £3,600 gross per tax year and so this is only a significant benefit if the earnings of the previous tax year support a higher contribution than £3,600.
When determining the net relevant earnings on which the member's continued contributions can be based, the earnings for the tax year in which the member's relevant earnings ceased, or the earnings for any of the five tax years immediately prior to that tax year, may be used. This means any of the six tax years for which the member has already provided evidence of earnings or can now provide evidence of earnings.
If this new rule can be used in conjunction with the five-year continuation rule, it could mean in an extreme case that the 'evidenced' net relevant earnings in respect of one tax year could be used to justify 'higher level contributions' for up to 11 tax years. (see case study: Charles)
Concurrent membership with occupational scheme
Partial concurrency represents a massive change from the previous rules that applied to pensions. What it means is that an individual who is a member of an occupational pension scheme throughout a tax year will now be able to pay up to £3,600 gross each tax year to a DC tax rules scheme while continuing as a member of the occupational scheme. In order to do so, they must:
• Not have been a controlling director of a company either in the tax year when joining the DC tax rules scheme or in any of the five preceding tax years. For this purpose, tax years prior to 2000/01 will not be taken into account
• Have had earnings from pensionable employment for at least one of the five previous tax years of no more than the remuneration limit of £30,000. For this purpose, an individual will not be able to use earnings from a tax year prior to 2000/01. Where an employee has not been employed for a full tax year, earnings will be grossed up to take account of this.
Before members can make a partial concurrency contribution, they must provide the scheme administrator of the DC tax rules scheme with a certificate that:
• Identifies the qualifying year ' the tax year the member is selecting where earnings are no more than the remuneration limit.
• Confirms earnings in the qualifying year are no more than the remuneration limit.
• Confirms total contributions will not exceed £3,600 gross.
• Gives the full name and address of any person who pays the individual remuneration from an employment where the individual is a member of an occupational pension scheme.
Once a qualifying year has been nominated in this certificate, contributions of up to £3,600 gross can be made for the five tax years that immediately succeed the qualifying year. These are known as the certificated years.
This means that an individual wishing to take advantage of partial concurrency in tax year 2001/02 would need to have earnings of £30,000 or less in tax year 2000/01. This would become their qualifying year and would enable contributions of up to £3,600 gross to be paid in tax years 2001/02-2005/06.
Such contributions could continue to be paid even if the employee's earnings in any one or more of those tax years exceeded £30,000. (see case study: Dave)
However, if the employee became a controlling director in any of these tax years, contributions under the partial concurrency provisions would have to stop immediately.
Members of DC tax rules schemes who are resident outside the UK are still eligible to contribute to a scheme during a tax year in which they have actual net relevant earnings.
They may contribute up to the higher of £3,600 gross and the amount based on the relevant percentage of their net relevant earnings.
Where appropriate, contributions may be based on evidenced net relevant earnings as determined under the five-year continuation rule and/or under the ability to pay contributions in years after earnings.
A member of a DC tax rules scheme who is resident outside the UK and has no net relevant earnings in a tax year is still able to contribute to the scheme if one of the following apply:
• At some time in the tax year, they are resident and ordinarily resident in the UK
• At some time in the five tax years preceding the one in question, they have been resident and ordinarily resident in the UK and were resident and ordinarily resident in the UK when joining the DC tax rules scheme. (see case study: Arnold).
• Carry back rules have been amended in respect of any contribution paid on or after 6 April 2001.
• Partial concurrency represents a massive change from previous pension rules.
• Members of DC tax rules schemes who are residents outside the UK can contribute to a scheme during a tax year in which they have net relevant earnings.
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