Budget 2009 announced fundamental changes to how individuals with taxable income over £150k are to be treated in respect of their pension contributions.  

The most prominent change is the decision to restrict relief for pension contributions for individuals with taxable income of over £150k with effect from 6 April 2011. The relief given for pension contributions will be tapered away so that for those earning £180k and over it is worth 20%, the same as for a basic rate taxpayer. However, other than this statement of general principles, Budget 2009 does not contain any draft legislation or worked examples which explain how the £150k figure will be determined, or how the charge will be calculated in practice.  

This lack of detail gives rise to a number of unanswered questions, notably on how the £150k threshold will be calculated. This issue is brought into sharp focus because the £150k limit is defined for the purposes of the anti-forestalling rules, as discussed below.  

The anti-forestalling rules are discussed in HMRC’s BN 47 and in 4 other detailed supporting documents. The anti-forestalling rules apply to individuals with income of over £150k who from 22 April 2009 attempt to accelerate their pension saving. The Government’s intention is that legislation will be introduced, for example, to apply to and impose charges on such individuals where they make pension contributions in excess of £20k in a tax year and these contributions are different from the normal pattern of their contributions. Draft legislation has been produced which defines what is meant by £150k of “income” in this context. Income includes not just employment income but savings and investment income as well. Further, the draft legislation provides that amounts forfeited under salary sacrifice arrangements are to be added back in for these purposes, along with the proceeds of arrangements which have as their main purpose or one of their main purposes bringing an individual’s income below the £150k limit. Therefore, the Government is taking active steps to prevent individuals from circumventing the £150k limit through salary sacrifice or other such arrangements.  

In the overall economic context of Budget 2009, the effects of these changes have been identified by many commentators as more important politically than for the revenue they will generate. However, the changes do represent a fundamental reform to the approach of tax incentives to the pensions industry in effectively reintroducing a form of earnings cap and by potentially redefining the basis of that cap as encompassing a wider range of income sources than merely earnings. While the technical details have yet to be digested by employers, especially in relation to defined benefit schemes, Budget 2009 probably contains the most radical reform of pensions taxation since the tax simplification changes introduced in 2006 (and which are undermined to a significant degree by Budget 2009).