Budget 2010: more detail on the high earner regime

In March, the Treasury published its response to its consultation on implementing the restriction on tax relief for high earners (effective from April 2011), alongside the Budget documentation. For more detail on the original consultation document and for an outline of basic principles underlying the restriction, please see our e-bulletin here

The Treasury confirms that the central tenets of the proposed new regime are unchanged, but the response does clarify the Government's thinking on the implementation of the new restriction (even though the Treasury defers its conclusions on certain problematic aspects). The new detail to emerge from the consultation exercise is summarised below:

Applying the restriction:

• The "income floor" of £130,000 remains. This means that only those individuals whose pre-tax income is greater than £130,000 can be affected by the restriction of tax relief on pension savings. These individuals will need to consider the value of any employer pension benefit, then add it to their pre-tax income, to see whether they are above the £150,000 income threshold which triggers the initial erosion of tax relief.
• The rate of relief will be tapered down from 50 to 20 per cent as gross income increases from £150,000 to £180,000. In the response document, the Government confirms that it will apply a stepped taper of one per cent of relief for every £1,000 of gross income.
• The Government does not favour aligning pension input periods with the tax year for the purposes of assessing benefit accrual against the annual allowance. However, the Government "will continue to consider the possible interactions to ensure that the overall treatment of pension contributions remains fair."
• The Government confirms its intention to apply the tax relief restriction to individuals who are members of overseas pension schemes which benefit from UK tax relief. The Government intends to publish regulations in Autumn 2010.
• The Government reiterated its intention that the restriction of relief should apply in the year in which benefits are drawn if the individual meets both income tests (i.e. the income floor of £130,000 and the £150,000 threshold) in the current or previous year. The Government will continue to consider how this "look-back test" might operate with a view to legislating in the Finance Bill 2011.
• Whilst the Government will consider its options on relaxations/exemptions relating to redundancy, it does not at this stage propose to go beyond its existing policy of exempting the first £30,000 of a redundancy payment from the income definition.
• New exemptions will apply where (i) an individual draws a serious ill-health lump sum; or (ii) dies before drawing their pension (in respect of their contributions that year). The Government is also "open to proposals" which would exempt enhancements resulting from early retirement on the grounds of ill-health, but is concerned about creating avoidance risk.
• Where schemes begin to wind-up before April 2011, any enhancements will be treated as accruing to members at the start of the wind-up (and will thus be outside the scope of the new regime).  

Valuing the defined benefit contribution:

• The Government confirms that it will use a two-way scale of age-related factors varying with both age and normal pension age in order to value the deemed contribution in defined benefit pension schemes. This system will incorporate inflation-based revaluation.
• The Government is also minded to incorporate pension increases in retirement in an average way, with adjustments for particularly generous pension increases.
• However, the Government will not provide separate public and private sector tables; nor will it provide separate tables by gender.
• Where individuals have multiple normal pension ages, the appropriate factors will be applied with respect to each tranche of their pension rights.
• Schemes will be required to calculate the deemed contribution. Therefore, regulations will oblige schemes to provide details of the deemed contribution to the individual.
• The Government will consider options for taking into account negative deemed contributions (possible, for example, where an individual has low salary growth and longer years of service at a time of high inflation).
• The Government will continue to consider whether special provision is needed in relation to enhancements.

Delivering the restriction – the employer's obligations:

• There will be an obligation on employers to identify any employee to whom they provide gross pay and taxable benefits of £130,000 or over (and whose pension they contribute towards) and to request a benefit statement from the scheme on the employee's behalf.
• This will only apply in relation to schemes which the employer sponsors.
• Originally, the Government had proposed that the benefit statement must be available by 6 July each year. However, the Government is now considering allowing employers to request the pension benefit statements at the point where information on taxable benefits is ordinarily known (i.e. by 6 July, to be available by 6 October). It is also considering the appropriate level of prescription as to the provision of information and timescales, with a view to publishing draft regulations in the Autumn.  

The "scheme pays" option:

• The Government remains committed to its view that individuals with the highest charges (over £15,000) should be able to elect for the scheme to pay.
• Members of both defined benefit and defined contribution schemes will be able to make an election.
• Trustees of defined benefit schemes will make an "actuarially fair reduction" to a member's benefits when the member elects for the "scheme pays" option. The Government is considering whether to introduce guidance on the calculation of the offsetting reduction.
• Where an individual is a member of more than one pension scheme, he or she will make a single election in a year, to one scheme only, and with that scheme required to pay only the portion of the recovery charge arising due to contributions or deemed contributions to that scheme.
• The Government will consider whether a scheme should be exempt from the requirement to pay the recovery charge on behalf of the member (where the member so elects) in certain narrowly defined circumstances (e.g. where the scheme is based overseas and is prevented from making the payment by its governing law or in a heavily underfunded defined benefit scheme).
• On a general point, the Government acknowledges that there are residual issues about how the "scheme pays" option will operate in practice and intends to work on resolving these.  

Spreading of payments over more than one year only possible in a very narrow set of circumstances:

• Where an individual incurs a charge exceeding £15,000 and their scheme is unable to pay that charge on their behalf, they will be able spread payments over three years, with interest charged on the deferred element.