Nichola Ross Martin's Tax Consultancy

This is a briefing note designed to be used to chat through the issues with new clients.

Do I need a pension scheme?

A pension is a "tax advantaged" method of saving for retirement. This means that:

• You receive tax relief when you make contributions into a tax approved scheme.
• There is no tax or National Insurance contributions (NICs) charged when an employer makes contributions on your behalf.
• There is an upper limit on the amount that you can contribute tax-free into an approved scheme each year and over the life of the scheme.
• Pension funds are tax-exempt and so your income grows within your fund tax-free.

Upon retirement a pension will provide you with a tax-free lump sum, followed by an income that is taxable. Your pension pot can be passed on to your family but is subject to a tax charge. 

For the tax years 2009/10 to 2010/11 there is a restriction on the amount of tax relief that those who have an income in excess of £130,000 can receive on their pension contibutions if contributions are made on an irregular basis. Regular contributions are unaffected.

From 2011/12 the amount of contributions that receive tax relief are restricted to £50,000 per year, however, you can carry forward unused allowances from the previous three years, so greater contributions may be possible from the outset.

Pension schemes can be expensive to administer; but personal pension schemes may benefit from low charges. Self Invested Pension Plans (SIPPs) are an alternative option: you select your own investments.

Companies can also set up their own schemes. These can be approved schemes which means that they qualify with HMRC's requirements, and are tax advantaged. However, unapproved schemes can also be an interesting alternative in remuneration planning.

Employers will have a new requirement to operate a workplace pension scheme starting from 2012. It comes in under phased introduction which means that whilst large employers will be required to operate the scheme from 2012, small employers do not face this new burden until 2016.

Detailed tax guides:

• Pensions: tax rules & planning: This provides an up-date on the current rules. This includes detailed worked examples and a step by step guide to help work through the proposed claw back of tax relief.
• Pensions: planning for directors: This guide explains how the new rules that apply from 2011/12 may affect directors and will interact with other benefits and incentive schemes. This includes worked examples to show how to make a pension contribution in specie, and advice on how to work within the pension restriction anti-forestalling rules.
• Employer Funded Retirement Benefit schemes (EFURBS) are unapproved schemes. These have been a popular component of many mass marketed tax schemes. Disguised remuneration (anti-avoidance measures) have been introduced in 2011 which go some way in restrict their use in making loan backs to employees. 

For more tax planning guides for directors see Tax planning for directors which has a summary of the lastest tax guides & checklists which cover this topic area.