Last month’s Budget announcements contained shock proposals in relation to pension contributions.
There is huge speculation about how the new rules will work. The reality is that we do not know for certain and will not know for some time. What we do know is that the rules will change from 6 April 2011 and the final shape of the new rules is subject to ‘consultation’.
The intention is that from 6 April 2011 anyone whose income exceeds £150,000 will start to see a progressive reduction in the tax relief they obtain on pension contributions, such that those with income over £180,000 will only receive tax relief at the basic rate, currently 20%. This contrasts markedly with the pre Budget day position where contributions attracted relief at the highest rate of 40%.
In the meantime, ‘anti-forestalling’ provisions have been introduced with effect from Budget day, to prevent individuals anticipating the future changes and taking advantage of the consultation period to maximise their position.
Given that we do not yet know the full picture, we hope the following will demystify the current uncertainty and make you aware of what we do know and the impact this is likely to have.
New Rules from 6 April 2011
The intention is that the new rules will have an impact on anyone who makes personal pension contributions, either as a self employed individual or as an employee, or for whom contributions are made by their employer to either a defined contribution of defined benefit company scheme. This includes contributions made by way of a salary sacrifice arrangement where a reduced salary is taken which the employer then contributes to a corporate pension scheme.
The way in which this will work remains to be seen. For a self employed individual or employee making personal contributions the position is likely to be more straightforward; they will only get relief at basic rate on the contribution, probably at source as now. However, for a company contribution the position is less clear. There is a suggestion that the individual will be levied with a taxable benefit equal to the contribution that the company makes, as a way of restricting the effective tax relief. The position is even less clear for members of defined benefit schemes, where individuals may be entitled to a proportion of their salary on retirement.
Anti-Forestalling Transitional Rules
In the meantime the anti-forestalling provisions have the following impact:
- If your income has not exceeded £150,000 in total for the current tax year (and the previous two tax years) the anti-forestalling provisions applying for the period up to the introduction of the new rules from 6 April 2011 should have no effect. (It should be remembered that the £150,000 limit is total income including dividends, rent, interest etc; not just salary or profit.)
- If your income exceeds £150,000 but your total pension contributions made by or for you do not exceed £20,000 per annum then the anti-forestalling provisions should have no effect.
- If your income exceeds £150,000 and you have made pension contributions in excess of £20,000 but have established a regular pattern of contributions pre Budget (at least quarterly) then the anti-forestalling rules should have no effect provided you continue to make contributions not exceeding this level in the period to 5 April 2011; neither increasing the contributions or otherwise altering the terms of the pension policy.
- If you have made contributions in previous tax years, at any level and in whatever way, or in the period in the current tax year starting on 6 April 2009 up to Budget day on 22 April, but will not make any further contributions, the anti-forestalling rules should have no effect.
- For anyone else, with income in excess of £150,000 in any of the relevant years, the intention is that you will receive tax relief on contributions post Budget day at only the basic rate. This will be achieved by the creation of a special allowance charge, treated as income, on any amount of contribution in excess of the greater of £20,000 or the level of regular payments established previously.
As mentioned above, the detail of both the new rules and the intermediate anti-forestalling rules is currently uncertain and there are many areas that require clarification. In the meantime, the notes above should allow you to determine whether you are likely to be caught or otherwise require further advice.
See our September 2009 update: Pensions for Higher Earners – Still attractive from 2011?
For further information, please contact Chris Maddock. Alternatively, please complete and submit the online form below.