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Pension problems for high incomes


This year’s budget contained a surprise announcement that from April 2011 those with incomes of £150,000 or more would have tax relief on their pension contributions restricted. Whilst those with incomes below £150,000 will still be entitled to the full 40% tax relief, the relief will reduce for those with higher incomes. The amount of tax relief will be tapered so that those earning above £180,000 will receive tax relief at basic rate (20%) only, although how this will work in practice is still to be consulted upon. One of the reasons for the change is the introduction of the new 50% income tax band from April 2010 which, unless something was done, would increase the amount of tax relief received by the high earners.

You may think that you don’t need to worry about these new rules until April 2011. Unfortunately not! Complex anti-forestalling rules have already been brought in from April this year. Those individuals making “regular” pension contributions may have nothing to worry about until 2011. Unfortunately the Government’s definition of “regular” only includes contributions made quarterly or more frequently. Hence those making six monthly or annual, or exceeding their regular contributions may be affected now.

The anti-forestalling rules limit tax relief to 20% on contributions exceeding the normal “regular” contributions for those with incomes of £150,000 or more, either in the tax year or in either of the preceding two tax years.

Where the total annual pension contributions are £20,000 or less the new anti-forestalling rules will not apply, irrespective of whether the contributions are made regularly or not.

For those making pension contributions into a money purchase pension on a less regular basis than quarterly, a last minute amendment was introduced by the Government, which increases the £20,000 limit under which the new rules do not apply to the lower of:
  • The average contributions paid for tax years 2006/07, 2007/08 and 2008/09 or
  • £30,000.

In addition where an individual had an active defined benefit arrangement in place prior to 22 April 2009, they may well be protected depending upon the circumstances.

Unfortunately implementing a new salary sacrifice scheme to effectively redirect salary into a pension scheme to reduce an individual’s income below £150,000 is one of the example’s HMRC give that will be caught by the new anti-forestalling rules. Payment of redundancy can also count towards an individual’s income and may take them over the £150,000 threshold, thereby restricting the pension relief available to them.

Tip: All is not lost as there are possible actions, including receiving a refund of excess contributions in certain circumstances or looking at alternative arrangements.

We can help

Despite statements about simplifying the UK tax system, the truth is that it gets increasingly complex each year. But we can help. We can guide you through the complexities of the legislation and help you to pay much less tax.

So if you would like to discuss ways in which we can help you to make tax savings, or if you would like to discuss any of the issues identified in this edition of ‘Pay Less Tax’ please do not hesitate to contact us.