At the last budget, the Chancellor introduced significant changes limiting tax relief on pension scheme contributions for those with ‘relevant’ earnings over £150,000pa, tapering down to 20% for those with earnings over £180,000pa (i.e. the same as basic rate tax payers).
The changes are to be effective from 2011. However, the Chancellor has introduced a new special annual allowance test to prevent excessive contributions in the interim.
In the spirit of the simplification, the guide produced by HMRC explaining the operation of the new regime and the interim proposals runs to 52 pages. A brief summary is as follows:
- Only those with relevant earnings over £150,000 in any of the tax years 2007/08 to 2010/11 are subject to the special annual allowance charge.
- Regular pension savings in place prior 22nd April 2009 are protected, termed ’protected pension input amounts’. This applies irrespective of the nature of the arrangement – DC, DB or hybrid.
- Non protected contributions (total adjusted pension input amounts) over the special annual allowance will be subject to tax at 20%. This will be collected from the individual via the Self Assessment tax return.
- The special annual allowance is £20,000. This includes protected amounts so, in the event any protected contributions exceed £20,000, the allowance is reduced to nil.
- The current annual input allowance continues to apply. However, to the extent that individuals may be subject to both the annual input charge and the special annual allowance charge, the latter will be adjusted to avoid double counting.
- Salary sacrifice arrangements entered into after 22nd April 2009 will require the amount sacrificed to be added back in to the calculation of ‘relevant’ earnings, similarly any contributions deducted under net pay arrangements are limited to £20,000.
Much of the technical guide sets out to close any loopholes that might enable smart IFAs to get round the new restrictions (there is even a specific catch all anti avoidance section).
However, for higher earners participating in occupational schemes with regular benefit accrual and/or contributions payments, the status quo will be reasonably well maintained to 2011.
Similarly, there is sensible provision to cover situations where scheme changes impact significantly on pension provision to ensure continued protection. Post 2011, although the detail is yet to be finalised and legislation is only draft at this stage, they can expect a significant tax hike.
There are a couple of areas of concern. Where scheme benefit changes are proposed, there has to be a minimum number of 50 member affected to ensure protection (presumably to avoid specific changes for high earners designed to avoid the tax changes). As such, smaller schemes looking to make benefit improvements, which might include increases to defined contribution arrangements, need to be mindful.
More significantly, problems might occur in the interim period where payments are made sporadically, one off contributions on the back of bonus payments and/or irregular AVCs for example. High earners with a history of these types of payments are strongly recommended to seek advice if they are to avoid significant tax bills.