Introduction
The Finance Bill 2009 received Royal Assent on 21 July 2009 and became the Finance Act 2009.
As a result, changes to the tax relief available on pension savings, announced by the Chancellor in the 2009 Budget, and subsequently modified, have now become law.
From 6 April 2011, the Government intends to restrict pensions tax relief for individuals with an annual income of £150,000 or more.
Relief will be tapered away, so that for those earning £180,000 per annum and over, relief will be worth 20 per cent, the same as to a basic rate taxpayer.
Before then, however, the Finance Act 2009 introduces new rules - which apply from 22 April 2009 (Budget Day) - to restrict higher rate tax relief on certain personal and employer pension contributions.
The aim of these ‘anti-forestalling’ rules is to deter affected individuals from increasing their pension contributions, in excess of their existing regular pattern, before 6 April 2011.
In broad terms, these rules limit tax relief to 20% on contributions exceeding the amount of existing ‘regular’ (i.e. quarterly or more regularly) contributions for ‘high-income individuals’.
Initially, these were defined as individuals whose ‘relevant income’ is £150,000 or more in the 2009/10 tax year, or in either or both of the preceding two tax years (2007/08 and 2008/09).
‘Relevant income’ includes all sources of taxable income, as well as earned income.
NB: The Pre-Budget Report of 9 December 2009 has amended this minimum ‘relevant income’ figure to £130,000 with immediate effect. Please refer to the separate section below.
Special Annual Allowance
Where contributions had not previously been made on a ‘regular’ basis, the fully tax-relieved contribution was originally going to be limited to £20,000 in a tax year for all high-income individuals (defined as “the special annual allowance”).
The individual would then suffer a 20% tax charge on any contributions made in excess of the special annual allowance (defined as “the special annual allowance charge”), collected via self-assessment.
However, fierce lobbying led to an ‘eleventh-hour’ Government amendment, specifically aimed at those individuals making ‘infrequent’ (i.e. less frequently than quarterly) pension contributions.
For ‘infrequently contributing’ individuals, therefore, full tax relief will now be given to £20,000 or, if higher, the lower of;
· the average of total ‘infrequent’ contributions made in each of the three tax years 2006/07, 2007/08 and 2008/09; or
· £30,000; or
· earnings in the tax year of the contribution.
Although this amendment should mean that those making ‘infrequent’ contributions may be able to obtain full tax relief for higher contributions than under the original proposals, such taxpayers will still be disadvantaged, as compared with those who were making ‘regular’ (i.e. quarterly or more regularly) payments.
For example, a taxpayer earning £250,000 a year and paying £5,000 monthly in pension contributions before 22 April 2009 will continue to obtain full tax relief on the £60,000 paid.
On the other hand, someone with the same income who pays the £60,000 each year as a single annual contribution will only obtain full tax relief on the first £30,000 in 2009/10 and 2010/11. A 20% tax charge will then be levied on the remaining £30,000 each year.
Important amendments announced in the 2009 Pre-Budget Report
In the Pre-Budget Report on 9 December 2009, the Government announced new rules that apply from 9 December 2009, affecting the restriction of the amount of tax relief on pension contributions, for individuals with incomes of £130,000 per annum and over.
From 9 December 2009, an individual will be defined as a ‘high income individual’ for the purposes of the special annual allowance rules, if their relevant income for the tax year is £130,000 and over.
This change will have effect for the current tax year (2009-10) and the 2010-11 tax year.
From 9 December 2009, the special annual allowance rules set out in Schedule 35 to the Finance Act 2009 will be amended. These rules will now apply to individuals:
· whose relevant income is £130,000 per annum and over,
· who change their normal ongoing regular pension savings
· and whose total pension savings in a tax year exceed £20,000 (or the lower of £30,000 and average contributions over the past three years, if contributions are less regular than quarterly).
As stated in the previous sections, those individuals whose income is £150,000 per annum and over are already subject to the special annual allowance rules introduced in the Finance Act 2009.
The special annual allowance will now apply to individuals whose income is £130,000 per annum and over, in respect of pension contributions, over and above their normal regular contributions, made on or after 9 December 2009.
Those with income below £130,000 per annum will be unaffected by the change.
Secondly, the special annual allowance charge will only apply for individuals with relevant annual income of between £130,000 and £150,000 when they increase their normal regular pension saving on or after 9 December 2009 and their total pension savings exceeds the amount of their special annual allowance for the tax year.
When this happens, the amount of the increase in excess of their allowance will be subject to the special annual allowance charge.
Are you affected by the ‘Anti-Forestalling’ Rules?
· The changes will NOT apply to you, if your relevant income is, or has been, less than £130,000 per annum in all of the tax years from 2007/08 onwards.
· The changes will NOT apply to you, even if your total annual income was £130,000 or more - provided that you continue as normal with your existing regular pension savings (which includes any employer contributions) and do not increase your pension savings
· The changes will NOT apply to you if your total annual income was £130,000 or more, and you do increase your existing regular pension contributions - provided that your total annual contributions do not exceed £20,000 (or the lower of £30,000 and average contributions over the past three years, if contributions are less regular than quarterly).
Pearson Jones can help!
These ‘anti-forestalling’ rules are undoubtedly complex and potentially undermine the phrase ‘pension simplification’, which was ushered in from 6 April 2006 (“A-Day”).
If you are in any doubt whatsoever as to whether you and/or your clients will be affected by this legislation, then please contact Pearson Jones, who will be happy to help.
This article is intended to be a brief summary of the main proposals in this area and is based upon our understanding of current legislation.
No action should be taken without first seeking professional advice from your Pearson Jones Consultant.