Pensions tax relief to be restricted for those with incomes over £150,000

The main pensions announcement coming out of this year’s Budget was that from 6 April 2011 the government intends to restrict pensions tax relief for those with an annual “relevant income” of £150,000 or more. Relief will be tapered away so that for earnings of £180,000 and over relief is worth the same as the basic rate. This restriction will apply to all pension contributions including those made by the employer. The government intends to consult on these measures.

Anti-forestalling measures to stop individuals from pre-empting the reduction in tax relief

The government is also proposing to introduce “anti-forestalling” measures into the Finance Bill 2009 to prevent individuals from pre-empting the reduction in pensions tax relief by accelerating additional contributions (including employer contributions) or accruals before 6 April 2011.

For individuals with a relevant income of £150,000 or more in the current tax year (or the preceding two tax years) the anti-forestalling measures will make them liable to pay a “special annual allowance tax charge” of 20% on any increases in pensions savings that:

  • are made on or after 22 April 2009;
  • exceed £20,000 (the new special annual allowance);
  • are not part of normal, regular ongoing contributions or benefit accruals under an arrangement that was in place before 22 April 2009; and  
  • do not relate to a pension arrangement set-up (for example as a result of new employment) or reactivated after 22 April 2009.  

The tax charge can apply to contributions paid under money purchase schemes and defined benefit pension schemes. However, the new tax charge is not intended to affect increases in contributions or accruals under defined benefit schemes if:

  • the increase is not made as a result of a “material change” on or after 22 April 2009 to the way the benefits are calculated under the pension scheme; or
  • the individual was accruing benefits under the pension scheme on 22 April 2009 and there are at least 50 active members of the same pension scheme whose rights are calculated on the same basis as for that individual.  

HMRC gives some examples of what it considers to be a “material change”. Examples include an increase in future accrual rates (for example from 1/80th to 1/60th) or the inclusion of significant bonuses in pensionable salary.

Care will be needed with these exemptions if (say) a reorganisation of pension arrangements (e.g. a merger) is envisaged, HMRC says that relief may pass to a new scheme, but the precise conditions need to be checked.

Contributions made to defined benefit schemes to purchase “added years” will not be subject to the annual allowance charge provided that the contributions are pursuant to and in accordance with a pre-22 April 2009 arrangement, satisfies some other conditions and have been made on a “quarterly or more frequent basis”. Commentators have suggested that the legislative wording may have unforeseen consequence for self employed individuals. Such individuals may be more likely to make large contributions on an annual basis rather than a “quarterly or more frequent basis” and will therefore be more at risk of the new special annual allowance tax charge applying.

The “anti-forestalling” measures only apply to individuals with a “relevant income” of at least £150,000. The draft regulations are intended to stop individuals from circumventing the “anti-forestalling” measures by using a salary sacrifice to reduce their “relevant income” below the £150,000 threshold. Any income that is reduced by a post 22 April 2009 salary sacrifice arrangement will be added back into the calculation of “relevant income”.

The proposed legislation will contain anti-avoidance rules that target schemes and arrangements (including agreements, understandings, transactions or series of transactions) which have as their main purpose or one of their main purposes to avoid certain tax charges.

Obviously the final detail on these provisions is subject to the legislation being enacted. Changes are possible as the Bill passes through Parliament.

Other Budget announcements relevant to pensions savings and pensioners:

  • from 6 April 2010 there will be an additional higher rate income tax of 50% for taxable income above £150,000. To take account of this change legislation will allow the tax rates for pension schemes to be changed (tax charges relating to registered pension schemes are generally linked to the highest rate of income tax);
  • personal allowance will be reduced by £1 for every £2 that an individual’s annual income exceeds £100,000 until the personal allowance is reduced to Nil;  
  • the Finance Bill 2009 will allow further secondary legislation to change the tax treatment of payments or transfers received by the Financial Services Compensation Scheme and the Financial Assistance scheme so that they broadly receive the same tax treatment as if they had been received by the insurer or original pension scheme;
  • the annual ISA investment limit will increase so that individuals can save £10,200 in their ISA, up to £5,100 of which can be saved in cash. The new limits will apply to people aged 50 and over for the current tax year and will be extended to all ISA investors from tax year starting 6 April 2010;  
  • there will be a one-off payment this winter, worth £100 for households with someone aged over 80 and £50 for households with someone aged over 60;  
  • to help lower income pensioners the capital disregard in Pension Credit, and pensioner-related Housing and Council Tax Benefit will be raised from £6,000 to £10,000 in November 2009;  
  • the government will launch a “tax back campaign” encouraging Pension Credit recipients to claim back overpaid tax and income;  
  • grandparents and other adult family members who care for their grandchildren or other members of their family aged 12 or younger for 20 hours or more a week will be able to gain National Insurance credits toward the basic State Pension from April 2011; and  
  • the Basic State Pension will increase by 2.5% next April.  

More information is available online on HM Revenue and Customs and HM Treasury’s website