Tax Factor

10 November 2009

Changes to tax relief for pension contributions – higher earners to face heavy tax increases

Individuals with income exceeding £150,000, or whose income has exceeded £150,000 in the past two years could find that tax relief on their pension contributions will be restricted from this year onwards.

The last budget included the announcement that from April 2011 tax relief for pension contributions will be restricted to the 20% basic rate, for those taxpayers with income greater than £150,000 per annum.

Detailed rules for the changes are yet to be published, but in a move to stop higher earners loading their pension funds in advance of the changes, the government announced interim measures which will restrict tax relief on pension contributions in the current tax year and next year. These interim measures have been termed as "anti forestalling" rules. For these measures we have full legislation, and it is more far-reaching than initially anticipated.

Who will be affected?

Essentially, the anti-forestalling rules can apply to anybody for whom pension contributions are in excess of £20,000* and whose total annual income exceeds £150,000 for the tax year in question, or either of the preceding two tax years.

"High Income" individuals who make contributions in excess of £20,000* will avoid a charge applying to the extent that the contributions are "regular" payments which commenced prior to 22 April 2009 and will continue beyond that date. For this purpose "regular" means any contribution made at least quarterly in frequency.

How will the restriction of tax relief work?

Normal relief will be given for contributions, but any excess over £20,000* will be subject to a special charge at 20%. Contributions paid personally already receive basic rate tax relief at source (i.e. for £80 paid, your pension fund will receive £100), so there will simply be no additional relief due.

However contributions made by employers (including your personal company) are made gross, so could lead to the individual having to actually pay additional tax through the self-assessment system.

What should you do now?

If you are a "high income" individual and have already exceeded the £20,000* contribution limit, you should consider carefully whether you wish to make further contributions in the tax year, given that these will only benefit from 20% tax relief.

If your company make a regular annual payment on your behalf, you may consider whether this should be deferred to avoid incurring a 20% tax charge.

We would recommend that you take early advice to see if you are caught by the provisions and then to discuss actions which can be taken to mitigate the impact.

For example, it may be that VCT or EIS contributions may be more tax efficient than additional pension funding. To discuss this further, please contact your usual Wilkins Kennedy contact.

*note that this limit is increased to the mean average of your non-regular pensions in the previous three tax years – up to an absolute maximum limit of £30,000