On 22 April 2009 the Chancellor Alistair Darling announced some significant negative changes to the tax relief rules for pension contributions made by high earners.
The main rule changes do not come in effect until 6 April 2011. However transitional rules were introduced with immediate effect and will last until 5 April 2011, when the new rules will be fully implemented. The transitional (or anti-forestalling) rules prevent those potentially affected from trying to pre-empt the change by increasing their pension contributions prior to the new rules being implemented.
Most people will be unaffected by the changes
It is important to remember that if you have relevant income (see below for definition) of less than £150,000 you will be unaffected by these changes and will be able to continue to claim full tax relief on pension contributions.
Therefore, putting money into pensions will still be a tax efficient option for the majority of people.
For example if you are a basic rate taxpayer and you invest £10,000, the Government will add on the basic rate tax relief of £2,500 making a total investment of £12,500. If you are a higher rate taxpayer (but your total income is below £150,000) you are also able to claim back the higher rate tax relief of up to £2,500 via your tax return.
For further examples see chart.
‘Relevant income’ for these purposes is determined by following an HMRC six page calculation (!), but is generally:
- Total income within the charge to income tax
- Plus pension contributions made under net pay arrangements
- Less trade and property losses
- Less relievable pension contributions (excluding employer contributions) up to £20,000 gross
- Plus any salary sacrifice in exchange for employer pension contributions, entered into after 22 April 2009
- Less Gift Aid donations
Watch out
- Even if your relevant income for a tax year is below £150,000 if it reached this level for either of the two preceding years you could still be caught by the new rules.
- If you artificially reduce your relevant income below £150,000 it is possible that HM Revenue & Customs (HMRC) will apply these rules as if your income is £150,000.
Transitional rules applying from 22 April 2009 to 5 April 2011
Between 22 April 2009 and 5 April 2011 if your total income is £150,000 or more then you may have to pay a personal tax charge on contributions over the special annual allowance. This includes contributions paid by your employer and deemed contributions to Final Salary schemes.
For the 2009/2010 tax year this charge is 20% i.e. effectively restricting the tax relief on the additional pension contributions to basic rate.
The charge does not apply to any normal, regular ongoing pension savings that were in place before 22 April 2009, whatever their value. Normal, regular and ongoing means:
- For money purchase schemes - continuation of those contributions paid under agreements made prior to 22 April 2009 either quarterly or more frequently and at a rate that does not increase.
- For defined benefit schemes - includes any increases in pension benefits which arise under the existing pension scheme rules as at 22 April 2009.
Special annual allowance
The special annual allowance is, or is based on, one of the following amounts
- £20,000, or
- greater than £20,000 but less than £30,000, or
- £30,000.
The amount of an individual’s special annual allowance will depend on many factors, e.g. whether payments have been made to other money purchase pension schemes in the last three years and whether any of these payments were ‘infrequent’ (i.e. less than quarterly).
Rules applying from 6 April 2011
Very little has been released about the proposed rules from 6 April 2011, but HMRC have said that they will consult widely before implementation.
The basics are that tax relief on pension contributions will be restricted for people with taxable incomes of £150,000 or more:
Income < £150,000, up to 40% tax relief will continue to apply;
Incomes > £150,000 tax relief will taper downwards; and
Income > £180,000 tax relief will be restricted to 20%.
Given that next year’s general election will take place before this proposed legislation is implemented there is of course a chance (although slim) that it will not be enacted.
Action
By careful remuneration planning and even a possible change in business structure there are ways to mitigate the effects of the new rules. If you are a Hazlewoods client we will look at the implications for you in the coming months, if not done already. If you are not a Hazlewoods client we would be happy to review your position in the light of the changes.