Pensions are one of the most important areas of long-term savings considerations and one of the most tax efficient. A higher rate taxpayer can contribute £100 to a pension fund at a cost of only £60, so why do so many of us put the matter off?

A new pensions regime took effect in April 2006 and created a single set of tax rules for all registered pension schemes

Under this regime, there is no restriction on the amount of contributions an individual can pay into a registered scheme, only on the amount of tax relief given This means that unlimited contributions may be made to, and retained by, a registered pension scheme Investment income and capital gains will accrue tax-free within the fund.

An individual will be entitled to tax relief on personal contributions in any given tax year up to the higher of £3,600 or 100% of ‘relevant UK earnings’ (broadly employment income or trading profit).

Contributions are paid net of basic rate tax. The pension provider will then recover this from HMRC Contributions will be eligible for higher rate tax relief, if appropriate.

Under the simplified regime there is a single rule for allowing a deduction in respect of employer contributions to a registered pension scheme It provides for a deduction subject to the contributions actually being paid in the period and made ‘wholly and exclusively’ for the purpose of the business.

Relief may be available to businesses for substantial employer contributions on behalf of employees.

Despite there being no limits on contributions that can be paid into registered schemes, the annual allowance acts as a control.

The annual allowance provides for the annual increase in an individual’s rights under all registered pension schemes to be calculated. This is then compared with the annual allowance and any excess charged to income tax at 40%. For 2010/11 the annual allowance is set at £255,000.

The second key control under the regime is the lifetime allowance. Although individuals can save as much as they like in registered schemes, when they start to draw benefits the value of their fund is tested against the lifetime allowance and any excess subject to the lifetime allowance charge. The lifetime allowance for 2010/11 is £1.8 million.

Where funds in excess of the lifetime allowance are be taken as a lump sum the rate of charge is 55%. The lifetime allowance charge on the balance of funds in excess of the lifetime allowance is 25%.

New rules were introduced from April 2009 which may limit the higher rate tax relief available to those with income exceeding £130,000

Tax-Free Savings


Individual savings accounts (ISAs) provide an income tax and CGT free form of investment. The maximum investment limits are set for tax years To take advantage of the limits available for 2010/11 the investment(s) must be made by 5 April 2011

In practice most ISA providers sell ISAs solely investing in stocks and shares. Banks and building societies provide cash ISAs.  16 and 17 year olds are able to open cosh ISAs.

Other Investments

There are a variety of other tax efficient savings products, many of which work in completely different ways. You should consider your needs in detail before entering into any commitments. Examples include:

National Savings products- these are taxed in a variety of ways.

Some, such as Savings Certificates, are tax-free.

Single premium insurance bonds

and ‘roll up’ funds provide a useful means of deferring income into a subsequent period when it may be taxed at a lower rate.

The Enterprise Investment Scheme (EIS)- income tax relief at 20% is available on new equity investment (in qualifying unquoted trading componies) of up to £500,000 in 2010/11. CGT exemption is given on shares held for at least three years. Where gains are reinvested in EIS shares, the capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred.

Venture Capital Trusts (VCT)invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from fox on dividends and on any capital gain arising from disposal of the shares in the VCT. Income tax relief currently at 30% is available on subscriptions for VCT shares, up to £200.000 per tax year, so long as the shares are held for at least five years (three years for shares issued before 6 April 2006).

NB – There is no possibility of deferring capital gains into VCT shares as there is with EIS.

When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the short and long term. An investment strategy based purely on saving tax is not appropriate.

How we can help

Whilst some generalisations can be made about pension and investment advice it is always necessary to tailor any advice to your personal situation therefore if you are need advice regarding pensions or investment advice  then please call Keith Rogers Accountants on +44 (0) 20 3145 0995so we can arrange a No obligation FREE initial meeting at one of our officesIf you are interested in instructing us we will offer you a FIXED FEE service with no hourly charges or hidden costs. You have unlimited telephone support during our opening hours to assist you in making the correct strategic decisions.  If you wish to view the other services that Keith Rogers Accountants offer then please visit our website