Restricted tax relief for pension contributions – will this affect you? - Mazars - United Kingdom
Restricted tax relief for pension contributions – will this affect you?
Individuals with “high income” may have tax relief for some of their pension contributions, or increases in pension fund benefits, capped at the basic rate of income tax. The Finance Act 2009 has added a new tax: the pensions “special annual allowance charge” (SAAC). When this tax charge applies it restricts the amount of higher rate tax relief on contributions paid into a pension scheme, or taxes part of the increase in benefits within a final salary scheme for the benefit of higher earners. This SAAC is an actual cash tax charge payable by the high-income individual. The SAAC applies for the tax years 2009/10 and 2010/11. The rules are complex and contain traps for the unwary.
Will you be paying a SAAC to HMRC?
Tax at 20% is payable on the premiums paid in excess of a “high income individual’s” “special annual allowance”.
Are you a “high income individual”?
The rules to determine if you are a “high-income individual” are complex. However, for most people a quick check can be done by:
- Totalling all your taxable income for the tax year (so including investment income)
- reduce this by tax deducible items such as expenses of employment, gift aid payments, and up to £20,000 of pension contributions
- which gives your “relevant income” for that tax year for the SAAC
- and if relevant income is £150,000 or more, you are a high-income individual for that tax year.
What is your special annual allowance?
The minimum amount is £20,000. Yours will be higher if you have historically made higher pension contributions. If you had been making regular (i.e. quarterly or more frequent) contributions before Budget day 2009 (April 22) of more than £20,000, your SAA is that higher amount (subject to certain conditions being met). If your contributions were made less frequently than quarterly, your SAA will be increased from £20,000 to the lesser of £30,000 and the mean of all the infrequent contributions made in the three tax years 2006/7 to 2008/9.
An example
In the current tax year Richard paid a gross pension premium of £50,000. Richard’s taxable income, ignoring any relief for the pension premium but after other expenses, is expected to be £175,000. He had not previously been making pension contributions.
Richard is a high income individual as his “relevant income” is £155,000 (£175,000 - £20,000) - well in excess of the £150,000 limit. His SAA is the minimum of £20,000, due to the absence of previous pension contributions. Richard will suffer a SAAC on £30,000 (ie £50,000 contributions less his SAA of £20,000), with tax payable of £6,000 (£30,000 @ 20%). The end result is that tax relief on the £50,000 pension premium is reduced from £20,000 to £14,000.
Defined benefit schemes (e.g. final salary)
The SAAC can also apply to a final salary scheme. Both the complexity in the way the legislation imposes a SAAC on individuals who are members of final salary schemes, and the comparative generosity of the SAAC in its application to such defined benefit schemes means that in practice, members of final salary/defined benefit schemes will rarely suffer a SAAC.
If you are, or may be, affected
It is important you take advice as there may be simple ways you can reduce or eliminate a SAAC.
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Richard Service
Tax Director
+44 (0)141 225 4935
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