Ross Brooke Financial Services

Tax Relief on Pension Contributions
By Michael Roberts - 18th May 2009

This article is currently being updated, following the pre-budget report. For immediate guidance, please contact us.

One of the key changes introduced in the budget concerns tax relief on pension contributions. Specifically, it affects those who currently (or in the previous two tax years) earn £150,000 or more. Beware though, as calculation of income may not be as straightforward as you would imagine. The plan is to restrict tax relief on pension contributions for these high earners from April 2011, with tax relief being tapered down to 20% for those earning between £150,000 and £180,000. This is coupled with a new 50% tax rate for those earning £150,000 or more from 6th April 2010.

There are also issues to consider for those whose income is expected to be around the £100,000 mark, with an effective tax rate of 60% to apply. Please refer to our separate news article concerning this issue. Loss of Personal Allowance (18th May 2009)

The new rules which are due to come into effect from April 2011 are still subject to a consultation period, and could change by the time they are introduced. This article therefore concentrates solely on the impact of the rules applying in the interim period, effective from 22nd April 2009.

The Immediate Changes

The budget introduced a concept known as "anti-forestalling". This basically means that immediate rules have come into effect to stop people taking advantage of the current pension contribution limits before the new main legislation becomes effective in April 2011.

Who is Affected?

• Anyone who has an income of £150,000 or more in the current or previous 2 tax years.

AND

• Amends their pension contributions or makes pension contributions less frequently than quarterly.

AND

• Pays monthly or quarterly contributions of £20,000 or more, or pays more than £30,000 less frequently than quarterly into their pension (including employer contributions)

For example, if you earned £170,000 last year and pay £1,000 per month gross into your pension, you would not be affected by these rules. However, if you also want to make a single contribution of more than £8,000 into your pension, you would then be caught by the anti-forestalling legislation.

If you have paid £40,000 per year by way of an annual contribution, this will now need to be reduced to £30,000 or you will need to pay the Special Annual Allowance Charge.

Who is not Affected?

• Anyone who's income has been less than £150,000 in the current and previous 2 tax years.
• Anyone who's total pension contribution is less than £20,000 per year if paid by mothly or quarterly contributions, or £30,000 per year if paid less frequently than quarterly.
• Anyone who already pays more than £20,000pa into a pension by monthly or quarterly contributions.
• Anyone who already pays up to £30,000pa into a pension by contributions made less frequently than quarterly.

What is "Income"?

Where Income is mentioned above, this refers to what the government describes as "Relevant Income". This is defined as total income including interest on savings, dividends, rental income, trust income and pension scheme income. The calculation of Relevant Income is likely to be where much of the confusion arises.

Can I Sacrifice my Income?

Salary sacrifice arrangements set up prior to 22nd April 2009 are not affected. However, new salary sacrifice arrangements entered into after this date will effectively be ignored for calculation of Relevant Income.

What is the Penalty?

The "Special Annual Allowance" refers to the limit of £20,000 and £30,000 pa pension contributions as described above. Any contributions paid in excess of this limit in respect of someone who is affected as described above will incur a 20% tax charge.

Disclaimer

This article is based upon our understanding of the current legislation, which is subject to change. This article is intended as a general guide to the new rules. The legislation is complex therefore we would recommend that you ask us for specific advice on your individual circumstances.

If you would like to discuss how this issue will affect you, please do Contact Us.