The Government announced that, from April 2011, the annual allowance (AA) for pensions contributions will be £50,000 and that from April 2012 the lifetime allowance (LTA) will be £1.5million.

Financial Secretary to the Treasury Mark Hoban announced ‘these changes will generate around £4bn annual revenue in the steady state, protecting public finances.’

We understand that the Government anticipates that most individuals and employers will look to adapt their pension's provision behaviour to ensure that their pension contributions remain below the AA. For traditional Defined Benefit schemes this will be more difficult because changes in circumstances can lead to one-off spikes in pension accruals.

Where the pension tax charge exceeds the AA, the Government has proposed that unused allowances from up to the three previous years will be carried forward to offset against the excess contribution. This is to be made available for both Defined Benefit and Contribution schemes.

It is intended that this will provide protection for the vast majority of people on moderate incomes. However, in exceptional cases where this mitigation is not sufficient, the Government intends to introduce further measures to ensure that individuals will not have to pay large charges from their current income. There is also an intention to consult this month on options to give individuals and schemes more flexibility over the payment of these charges.

As the ‘high income excess relief charge’ was due to take effect from 6 April 2011, it now appears that this legislation will effectively be defunct once the new legislation is enacted as both have the same implementation date.

However it will still be necessary for the Government to repeal this unwanted legislation by 31 December of this year and it is on this basis that we can probably expect them to do so.

The proposed draft legislation together with Explanatory note can be found at http://www.hmrc.gov.uk/pensionschemes/aa-draft-leg.pdf.