Biggart Baillie Solicitors

Pensions Changes Following Finance Act 2009

In Budget 2009 the Chancellor announced his intention to restrict tax relief on pension contributions for higher earners, i.e. those with a taxable income of £150,000 or more.  It is anticipated that these changes will come into place on 6 April 2011.  Instead of receiving relief at their marginal rate of tax, those with incomes in excess of £150,000 will have tax relief on their contributions tapered down until it is 20% for those on incomes over £180,000.

Having made this announcement so far in advance, HMRC were concerned that those individuals who may be affected by these proposals would increase their pension contributions in the interim period with a view to forestalling this change.  As a result Finance Act 2009 contains an anti-forestalling charge.  Needless to say, the provisions are complicated.

Step 1 is to test if the relevant income (which includes investment income) exceeds £150,000 in any of tax years 2007/8, 2008/9 or 2009/10.  Pension contributions paid by the employer under a net pay scheme are added back for this purpose as are salary sacrifice arrangements made after 22 April 2009.  Relievable pension contributions up to a maximum of £20,000 are then deducted along with any gift aid donations, loss reliefs etc.

Where the income limit in any one of those three years is exceeded then the total amount of pension contributions, whether by employee or employer, for 2009/10 and 2010/11 has to be checked.  Where these contributions exceed £20,000, subject as aftermentioned, a special annual allowance charge is levied on the taxpayer, regardless of who made the contribution, at 20% of the excess.  This has the effect of restricting tax relief on any additional pension contributions to the basic rate.

Certain contributions are treated as “protected pension input amounts”.  The special annual allowance charge will not apply to them.  These include regular contributions, i.e. paid at least quarterly, to money purchase schemes or personal pensions, where the rate or amount has not changed after 22 April 2009, unless as a result of a pre-existing agreement. In the case of defined benefit schemes, contributions that continue to accrue the same benefit on the existing benefit scale as before 22 April 2009 will enjoy protection.  Irrespective of the size of these regular pension contributions, they will continue to enjoy exemption from the special annual allowance charge.

Otherwise, there is a special annual allowance of £20,000 although this is reduced by the total of any regular pension contributions, i.e. protected pension input amounts.  Thus, if Mr A has made regular contributions of £1,000 a month since before April 2009 he can continue to make those and make an additional payment of £8,000 without incurring the tax charge. However, if he has made regular contributions of £2,000 per month, although there will be no charge on the £4,000 by which these exceed £20,000, no further contributions can be made without a charge.

After intense lobbying by the pensions industry during the passage of the Finance Bill, it was acknowledged that many self employed people do not make regular contributions.  For irregular contributors to money purchase schemes, the special annual allowance is increased to whichever is the lesser of (a) the mean of irregular contributions for years 2006/7, 2007/8 and 2008/9 and (b) £30,000.

Note, however, that the anti-forestalling tax charge does not prevent a pension contribution being tax deductable in the normal way for other tax purposes.  Thus, such a contribution may still reduce the taxpayers’ income from, say, £110,000 to £90,000 thus avoiding the clawback of personal allowance.  It may, as a result, therefore still be worth making it.