The new Government had previously indicated that it was going to depart from the Labour Government’s plans in respect of ‘high earners’. The new Government’s plans have now been published.
What had the Labour Government planned to do?
Gordon Brown had introduced measures to restrict tax relief for ‘high earners’ from April 2011. Those measures centred on the restriction of tax relief for those earning an income of above £130,000 (with that limit possibly moving down to £100,000). At the same time, the lifetime allowance and annual allowance were to be frozen at their current level for the next five years.
What is now going to happen instead?
Having consulted on its plans, the Government announced on 14th October 2010 that it would be reducing the annual allowance from £255,000 to £50,000 with effect from April 2011. The ‘annual allowance’ is the amount by which a member’s benefits are allowed to grow in a pension scheme (through, for example, contributions or investment growth) each year without them being subject to a tax charge. The figures allowed before the tax charge would apply will therefore be significantly reduced, and the change applies to all members, not just ‘high earners’. However, the Government has stated that the reduced annual allowance will affect around 100,000 pension savers, 80% of whom have incomes of over £100,000.
The lifetime allowance (which is the limit on the total amount an individual can save as pension benefits without incurring tax charges) was set to be fixed at £1.8 million for five years. That figure will now be reduced to £1.5 million. The announcement made by the Government is not explicit as to whether this lower figure is also to be fixed for five years, but that seems to be the intention as a minimum.
The Government has also stated that, to protect individuals who exceed the annual allowance due to a one-off “spike” in accrual, offsetting against unused annual allowance from previous years will be allowed. There will also soon be a consultation on options to enable people to meet tax charges out of their pensions. However, no further detail is given on these changes.
A further suggested reform had been to remove the current exemptions from the annual allowance test, most notably the exemption that means that no test is applied in the year that a member’s benefits come into payment. However, there is no further detail on this contained in the announcement.
One of the problems that had been identified with the Government’s change to the annual allowance relates to the way that DB benefit accrual is valued and tested against the annual allowance figure. Given the significant reduction in the annual allowance, normal continued accrual could lead to a breach of the annual allowance even for modestly paid members. This is because, as well as the decreased annual allowance, the Government have suggested a technical amendment which would mean that the factor used to establish the value of a member’s benefits at the start and end of the annual allowance period is to be raised from 10 to 16.
The Government has estimated that implementing these changes will save around £4 billion, but much of the detail around how these changes will be introduced is yet to be published.