From April 2011 tax relief will be tapered away so that for those earning £180,000 and over it is worth 20 per cent, the same as for a basic rate taxpayer. The Emergency Budget confirmed that these proposals will be introduced on 6 April 2011 but the government has announced that it will consult on the mechanics of the proposed system with a view to simplifying matters.
The government was concerned that individuals likely to be affected by the change in 2011 would pay substantial pension contributions before then and it is therefore introducing what it refers to as anti-forestalling legislation in the Finance Act 2009. This anti-forestalling legislation will apply to pension contributions/pension accrual from 22 April 2009 to 5 April 2011 (i.e. until the main legislation takes effect in April 2011).The anti-forestalling legislation will restrict higher tax relief on pension contributions for individuals on incomes of £130,000 or higher that are in excess of their normal pattern prior to the new regime coming into effect.
This will be achieved by introducing a special annual allowance, which sets a limit of £20,000 on the amount of non-regular pension savings for which full tax relief at rates above basic rate can be given. This applies from 22 April 2009 and an associated tax charge will be collected via an individual’s self-assessment tax return. This special annual allowance may be increased to £30,000 where contributions have been higher in the three tax years 2006/07 to 2008/09. This will be of some interest to high income individuals who prior to Budget Day had significant irregular contributions.
Pre-22 April payments are not subject to the special annual allowance charge but will not provide protection for future payments unless the existing payments were paid on a regular basis. A pattern of single payments will not provide protection even where the pattern can be easily demonstrated.
Regular payments that were paid at least quarterly prior to 22 April will be known as Protected Pension Input Amounts. These will provide protection against the special annual allowance charge for future regular payments, up to the level that was previously being paid.
In order to qualify these regular payments must continue to be paid to the same scheme. Clients who switch providers or leave an employer’s scheme will lose this protection.
Where an individual is subject to an annual allowance charge as well as the special annual allowance charge, the amount subject to the special annual allowance charge will be reduced by the excess over the existing annual allowance to avoid a double tax charge.
Where an individual is subject to the new special annual allowance charge they may be able to seek a refund of personal (but not employer) contributions.
The new special annual allowance charge can never apply if ‘relevant income’ for the current and two preceding tax years is under £150,000. If relevant income is below the £150,000 threshold for 2007/08 and 2008/9, then it could pay to keep ‘relevant income’ down in this tax year (and the next) if somebody wants to make substantial pension contributions. Stay below the £150,000 threshold and there is no risk of losing higher rate tax relief on contributions in 2009/10 and 2010/11.
It will be difficult (in some cases impossible) to control one’s level of earned income. However, where feasible, consideration should be given to redistributing income to spouse/family. In addition there are a number of ways in which ‘relevant income’ arising from investments can be limited, for example:
- By transfer of income-generating assets to a spouse. Such transfers would be beneficial, even if both spouses pay higher rate tax
- By restructuring investments to produce less taxable income
- By making Gift Aid contributions
- For the self-employed, by taking advantage of the £50,000 annual investment allowance to buy plant and machinery, possibly bringing forward planned investments from later years
- It is envisaged that VCTs and EIS’ will become more popular s to make firm partnerships