The measure
Higher rate income tax relief is being restricted for
contributions by or on behalf of individuals to UK registered
pension schemes and qualifying overseas pension schemes. Higher
rate relief will be tapered away for those with taxable incomes (as
adjusted) of between £150,000 and £180,000 from 6 April
2011 so that for those with incomes above £180,000
contributions will only benefit from basic rate tax relief. The
exact mechanism for applying these rules has not yet been
decided.
Provisions applying from 22 April 2009 will prevent the
forestalling of the new rules. For the tax years 2009/10 and
2010/11 individuals with incomes of at least £150,000 in the
year, or any of the preceding two tax years could be affected.
Steps taken to reduce income below £150,000, for example by
entering into salary sacrifice arrangements set up after 22 April
2009, will be negated by adding back the amount sacrificed.
There will be a special annual allowance of £20,000. This
will be applied to any pension savings that exceed the
individual's normal established pattern of contributions.
Contributions in excess of this level will be taxed at 20% for
2009/10 and will be collected via self-assessment. From 2010/11,
when the 50% top income tax rate takes effect, indications are that
this special allowance charge may increase to 30%. Enhanced
protection does not prevent this charge arising.
The special annual allowance is eaten up first by any protected
pension savings (ie normal ongoing regular pension savings) and any
one-off amounts paid between 6 April 2009 and 22 April 2009.
The special annual allowance charge applies in addition to the
normal annual allowance charge that was introduced from 6 April
2006 (£245,000 for 2009/10). However where both the normal
annual allowance and the special annual allowance are both exceeded
the amount subject to the special allowance charge is reduced by
the normal annual allowance excess.
It may be possible to claim a refund of contributions paid on or
after 6 April 2009 to prevent the special annual allowance from
applying. However any refund will be subject to a 40% tax charge,
payable by the scheme administrator.
Who will be affected?
From 6 April 2009: individuals with adjusted income of at least
£150,000 in either the current or any of the previous two tax
years.
In each case the new rules will only apply to those who change
their normal pattern of pension saving and whose total pension
savings exceed £20,000 per year.
For money purchase arrangements a regular pattern of contributions
include those made on a normal basis at least quarterly and for
defined benefit arrangements they include any increases in
accordance with the scheme rules in effect on 22 April 2009.
One-off contributions made, for example, once a year, are not
regarded as normal ongoing regular contributions and are therefore
likely to be subject to the special annual allowance charge.
The changes have no impact on corporation relief for employer
pension contributions.
When?
The main change comes into effect from 6 April 2011, but rules apply from 22 April 2009 to prevent individuals taking advantage of the deferral.
Our view
This represents yet another nail in the coffin of pensions tax
simplification. A mere three years after the introduction of the
new regime, employers, individuals and the pensions industry have
another set of complexities to grapple with. It is inevitable that
the administrative costs of running a pension scheme are going to
remain high for a further period of time before these new rules bed
down.
Whilst the restriction of higher rate relief is billed as coming
into effect on 6 April 2011, the forestalling rules have immediate
effect.
The ability to save toward pensions when individuals can afford to
do so, rather than being tied to regular contributions, is
potentially severely hampered by the new proposals, given that only
'normal, regular ongoing pension savings' are protected
from the new special annual allowance. This flexibility has been
important ever since so called 'carry back/carry forward
relief' was withdrawn and potentially adversely affects the
self employed and employees that make a significant part of their
pension savings once a year from bonuses, instead of or in addition
to salary.
We urge caution to employees considering 'waiving bonuses into
pensions'. Until now, this has been a highly efficient way of
increasing pension savings, attracting relief from employee and
employer National Insurance Contributions (NIC). However, whilst
such a pension contribution made on or after 22 April 2009 might
save employee NIC at 1% (1.5% from 2010/11) and employer NIC at
12.8% (13.3% from 2010/11), if it is caught by the new forestalling
rules, it would be subject to the new tax charge at 20%. Whilst
employers will still save NIC, employees will clearly be
significantly worse off overall.
Another potential inequity relates to the way in which the
forestalling rules look back to earnings arising since
2007/08.
Taxpayers in the 40% tax band after 2010/11 will be breathing a
sigh of relief as they will continue to get relief at 40% on their
contributions, or 60% if their Personal Allowance is being phased
out.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.