By default, the software will restrict employee and employer contributions, into a money purchase account, as follows:
- Employee contributions are restricted to the annual contribution allowance (£40,000),or to an individual's earnings, whichever is the lower of the two figures.
- For individuals without earned income contributions are restricted to £3,600.
- Employer contributions are restricted to the annual contribution allowance.
For situations where the combined employee and employer contribution is expected to exceed the contribution allowance, in any year of a client’s plan, it will be necessary to ‘de-restrict’ contributions, on a scheme-by-scheme basis, and this is the case regardless of any ‘carry forward’ allowance that is available to the individual (of which see more below).
By default, therefore, the software will restrict an individual’s total pension contributions (combined employee & employer contributions) to the annual contribution allowance, with the caveat that employee contributions may be further restricted (on the basis of earnings), as outlined. (We felt that this default restriction would act as a useful safeguard). Where the total combined contribution exceeds the allowance, the software gives priority to employee contributions, in terms of how the contribution allowance is applied.
For the rare instances where the combined employee and/or employer contribution is expected to result in a gross contribution exceeding the allowance, the option exists to override the default setting, on a scheme by-scheme basis, as illustrated below, by switching off the Limit contributions to allowance toggle:
Even when one chooses to override the usual restriction on pension contributions, earned income/pensionable earnings continues to represent a statutory cap on employee contributions, and this applies regardless of any unused annual allowance to be 'carried forward' from previous years, in accordance with legislation. With regard to employer contributions, on the other hand, there is no such restriction.
Earned income (‘Salary’ plus ‘Bonus/Commissions’), entered as Employment income, defines one’s relevant earnings, for the purpose of pension contributions. Without supporting earnings, entered as Employment income, pension contributions are limited to £3,600 per annum.
The consequences of exceeding the annual contribution allowance (where the restriction has been lifted, and is not mitigated by any ‘carry forward’ allowance) depend upon the value of the respective employee and employer contributions, as follows:
- Any employee contribution that exceeds the annual contribution allowance will be credited to the pension account, in full, but will only receive tax-relief up to the value of the contribution allowance.
- Any (portion of) employer contribution that exceeds the annual contribution allowance will be identified as an Excess Employer Pension Contribution, and will be treated as additional taxable income.
Once again, the software gives priority to employee contributions, in terms of applying the contribution allowance.
With regards to the contribution allowance, the software will automatically ‘carry forward’ any unused contribution allowance, from the preceding 3-year period (where the default restriction has been removed). Where ‘carry forward’ allowance is available from the three years immediately preceding the start of the plan, these allowances can be entered via the Dashboard in Carryover Assumptions > Pension Lifetime Allowance & Carry Forward > Available Pension Contribution Carry Forward:
Click + Add Carry Forward and in the boxes which appear enter the relevant contribution allowance to be carried forward, from each of the 3 years preceding the start of the plan.
These entries will override the annual contribution allowance limits for up to three years into the plan (once the default restriction has been removed, as already detailed) but note - as also stated above - that the earnings limit will continue to apply in each year.