The main pension issue in the Pre-Budget Report (“PBR”) is the inclusion of employer contributions in the assessment of income for high earners.
The March 2009 Budget announced a restriction of pensions tax relief from April 2011 for those with a gross annual income of £150,000 and over (restriction to basic rate for those with a gross annual income of £180,000 and over and tapering relief on incomes between those two amounts). This will still apply, but “gross income” will include all pension contributions, including those funded by an employer (employer contributions to DC schemes and the value of pension benefits funded by a DB scheme employer). This will be subject to an income floor, so that individuals with pre-tax incomes (excluding employer pension contributions) of less than £130,000 will be unaffected, regardless of the level of employer contribution.
There will be an obligation on employers to identify any employees with a gross annual income of £130,000 or over and for whom they make pension contributions. They will have to request a benefit statement from the scheme, which the scheme must provide within three months. HM Treasury PBR materials Summary of March 2009 Budget: Pensions Update, April 2009
Excess relief that falls to be clawed back under the restriction will be collected through self-assessment under a new “high income excess relief charge”.
This will be set at an “appropriate rate” designed to recoup the relief payable at the taxpayer’s marginal rate, i.e. his marginal rate minus 20%:
Click here to view table
If the charge exceeds £15,000 in any given case, the government is considering allowing the member to require it to be paid by the scheme and recouped from his benefits.
The anti-forestalling measures introduced in the March 2009 Budget will be extended from 9 December 2009 (the date of the PBR) so that all those with incomes of £130,000 and over will be subject to the special annual allowance.
A consultation on the implementation of these changes has been issued, closing on 3 March 2010. Views are sought on many issues, including how DB pension benefits should be valued for the purpose of calculating “gross income”.
In addition, to reflect the introduction of the 50 pence income tax rate there will be changes to the rates of certain pensions tax charges:
- short service refunds made on or after 6 April 2010: the current tax rates of 20% on the first £10,800 of the refunded contributions and 40% on the remainder will be replaced by rates of 20% on the first £20,000 and 50% on the remainder;
- certain payments made by employer financed retirement benefits schemes (“EFRBS”): the tax charge payable by the recipient will increase from 40% to 50% for benefits received on or after 6 April 2010;
- special annual allowance charge: the March 2009 Budget set the rate at 20% but from 6 April 2010 it will instead be set at the “appropriate rate”, on the same basis as will apply for the high income excess relief charge from 6 April 2011