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Pension Contribution Allowances

The Chancellor has announced measures that he believes will see a further 70,000 individuals affected by the capping of tax relief on pension contributions, in total a mere 2% of pension savers.

In April 2009, the Government announced the capping of tax relief on pension contributions for ‘high income individuals’; broadly those with income in excess of £150,000 pa. The broad proposal is to reduce tax relief for affected individuals on a tapered basis, so those with income above £180,000 will receive basic rate relief with effect from 6th April 2011.

The Pre-Budget Report announced a slight simplification which means that those with gross taxable income of less than £130,000 (the ‘floor’ income) will not usually need to consider the more detailed rules to establish that they are outside the charge. However, employer pension contributions will be taken into account for those who are caught by the rules.

Draft detailed proposals have been published with a consultation period until 3 March 2010, so it appears the rules will be included in the next Finance Bill.

The taxpayer may opt for the pension scheme to pay the tax charge out of their “pension pot”, particularly relevant in schemes where only employer contributions are being made. In under-funded schemes there may also be the possibility for the taxpayer to pay the charge over three years.

Also in April 2009, ‘anti-forestalling’ measures were introduced in order to limit tax relief for pension contributions for individuals with relevant income above £150,000 in the tax years 2009/10 or 2010/11, or either of the two previous tax years. Where contributions exceed a newly introduced special annual allowance, a tax charge applies, which is based on the difference between the individual's highest rate of income tax and the basic rate of income tax, giving a charge of 20% for 2009/10 and up to 30% for 2010/11.

The original anti-forestalling rule did not affect individuals with relevant income below £150,000 a year and took no account of employers pension contributions. However, the Chancellor has announced that the income definition for the £150,000 threshold for the anti-forestalling charge will include the value of employer pension contributions in respect of contributions on or after 9 December 2009. To reflect the proposed ‘floor’ income rule it will not apply to those with gross income under £130,000.

As a consequence of the above, the special annual allowance charge should now apply to individuals whose relevant income is £130,000 and over, but less than £150,000 only when they increase their normal regular pension contributions on or after 9 December 2009, and their total pension contributions (including employer contributions) exceeds the amount of their special annual allowance for the tax year. But advice should be sought if in doubt since the detailed rules are complex.

All taxpayers with total income approaching or exceeding £130,000 who have pension provision should urgently review their position again, especially those in employed funded schemes.

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