The Chancellor announced that from the 2011/12 tax year higher-rate tax relief will be reduced for those with income of more than £150,000, tapering as the level of income increases, so that those with incomes in excess of £180,000 per annum will only receive basic-rate tax relief.
The Government realises that it will have to include anti-avoidance measures within the legislation and that establishing the value of employer contributions to defined benefit schemes will introduce complexity. They will therefore consult interested stakeholders with a view to avoid unnecessary administrative complexity in the final legislation.
At this stage therefore there is very little detail on how the proposal will operate with effect from April 2011.
Interim restriction on higher-rate tax relief from 22 April 2009 for higher earners
Having announced the abolition of higher-rate tax relief for higher earners from 2011, the Government wish to avoid providing a large amount of tax relief in the intervening period on contributions that would have otherwise been paid after that date. They have therefore introduced some interim measures.
The measures operate by introducing a Special Annual Allowance Charge of 20%.
The Special Annual Allowance Charge will apply only to those whose income exceeds £150,000 in the tax year or in any of the two previous tax years. Income for this purpose is:
- total income for the tax year before pension contributions, personal allowances or any other reliefs or deductions
- less any normal deductions for reliefs (such as trading losses), including deductions for pension contributions up to a maximum of £20,000
- less gift aid deductions
- plus any income foregone by a salary sacrifice arrangement in return for pension contributions entered into on or after 22 April 2009.
Note also that contributions paid before 23 April 2009 are excluded from the 2009/10 tax year.
A person's Special Annual Allowance is £20,000 per annum. Employers' contributions and defined benefit scheme accrual are included in the calculation of the £20,000 limit, ie it is calculated in the same way as a Pension Input amount for Annual Allowance purposes. Subject to two exemptions, any input in excess of £20,000 will be subject to the Special Annual Allowance Charge.
Generally speaking, therefore, existing tax reliefs will continue to be available to all whose input amount in a tax year is £20,000 or less.
The exemptions are:
- Where regular contributions currently exceed an input amount of £20,000 per annum. No charge will occur up to that amount providing that the regular contributions continue to be paid in accordance with contractual obligations in force before 22 April 2009. Note that contributions paid less frequently than quarterly do not count as regular contributions.
- Where the member retires on grounds of ill heath or dies before the end of the tax year.
Other pension changes
Provision is being made to allow Treasury Orders enabling Pension Tax Charges, eg increasing the Lifetime Allowance charge to take account of the higher rates of personal taxation proposed in the Budget. No indication has been given of how much the charges will be increased by, or whether in fact they will be increased.
Benefits payable under the Financial Assistance Scheme will be subject to the same tax treatment as benefits under a Registered Pension Scheme.
Although not mentioned in the Budget, as mentioned in the Pre-Budget Statement the Annual Allowance and Lifetime Allowance will be frozen at the 2010/11 levels of £255,000 and £1.8m until 2015/16.