The background In the 2009 budget, the chancellor announced the restriction of tax relief on pension contributions for individuals who earn at least £150,000 from 6 April 2011. Relief will be tapered away so that for those earning £180,000 and over, it will be worth only 20 per cent.

To prevent individuals from trying to make additional pension contributions prior to the reduction of tax relief, the government has introduced "anti-forestalling" provisions in the Finance Act 2009. These provisions take retrospective effect from 22 April 2009 and are now in force.

When will pension contributions be taxable? The anti-forestalling provisions will place a tax 'charge' on individuals who are making pension contributions (including Additional Voluntary Contributions (AVCs) and regardless of whether these are made by the employer or the employee) in excess of the special annual allowance (£20,000, rising to £30,000 in limited circumstances). The policy behind this is to deter individuals from trying to boost their pension contributions and take advantage of the existing tax relief, prior to the reduction of such relief in April 2011.

1 Identify "the relevant income" First an employee will need to identify whether they have taxable income of £150,000 or more. It is worth noting here that 'income' is widely defined and extends beyond an employee's normal earnings.

2 Work out the employee's "total adjusted pension input amounts" The tax charge is aimed at individuals who increase their pension savings from 22 April 2009 above their normal regular amount.

Under the legislation, broadly speaking, any normal regular pension savings that an individual made under arrangements that were in place before 22 April 2009 (and continues to make on the same basis going forwards) will not be subject to the special annual allowance charge. These amounts are referred to as "protected pension input amounts". AVCs will only be protected pension input amounts if they have been paid regularly (at least annually) prior to 22 April 2009.

However, an individual's special annual allowance will still be reduced by the amount representing any protected pension input amounts for that year. This means that, where an individual's protected pension input amount is £20,000 (£30,000 in limited circumstances) or more, although the protected contributions themselves will not be subject to a tax charge, the individual's special annual allowance for that year will be reduced to nil. Any new additional pension contributions made during the course of that year (which are known as "total adjusted pension input amounts") would therefore be subject to the new tax charge.

The tax charge is currently set at 20%, but is likely to rise to 30% when the new higher rate of income tax of 50% comes into effect from April 2010.

What has this got to do with potential scheme changes? In defined benefit schemes future accrual will be protected provided there has been no 'material change' in the rules of the pension scheme to the way that benefits to or in respect of the individual are provided under the arrangement after 22 April 2009. HM Revenue & Customs' (HMRC's) guidance suggests that material changes are likely to include such things as changes in the method of calculating pensionable salary, increasing the accrual rate and including bonuses to pensionable salary.

There will also be protection where there is a material change to the way in which the benefits are provided which affects at least 50 active members of the scheme (provided it is not done for the purposes of tax avoidance)

In relation to a new or reactivated arrangement (e.g. introduced after 22 April 2009) there can be no protected pension input amounts if:

  1. either the benefits the employer provides under the arrangement fall outside the normal pattern of benefits that the employer provides to its employees generally; or
  2. fewer than 20 other persons who have arrangements under the scheme accrue benefits on the same basis as the individual and who are also employees of the same employer.

However, there are a number of scenarios which could take the individual out of the above exemptions, and mean that their pension contributions are no longer protected, and are potentially liable to a tax charge.

We have made/are making a scheme change but it affects more than 20 members so is there a problem? Consider, for example, a situation where a company is closing its defined benefit scheme to future accrual and placing all employees (i.e. being more than 50 of them) into an existing/new defined contribution arrangement for future accrual. If employees with income over £150,000 are placed into an arrangement in which there are less than 20 employees (e.g. a senior executive arrangement, or an arrangement whereby they receive higher employer contributions when compared to other employees) such contributions may be subject to the new tax charge.