Mercer warns of pension tax reform issue

Higher-earners who invest money into a pension scheme above the £50,000 tax-free limit, which is brought in in April 2011, could still be taxed according to a recent warning from Mercer.

The pensions consultancy said that higher rate taxpayers could be affected by the pensions input period (PIP) rules, which govern the amount that is invested in pensions in a given year – and the problems occur when these do not correlate with the tax year.

On 14 October 2010, the annual limit for tax-free pension contribution was reduced to £50,000 from £25,000. Mercer says that higher rate tax payers could be taxed on the amount they invest in pensions between 14 October and the end of their pension input period.

In other words, if someone’s PIP ends after 5 April, the date the new limit is introduced, and the end of the tax year, they could be taxed on the amount they invest in their pension scheme between 14 October and the end of their PIP.

Mercer’s retirement research group head, Deborah Cooper, said, “HMRC appears to be taking a very pragmatic approach to this, which is helpful, but trustees have to take action for members to be able to benefit from their proposals.”