28 April 2010
Special Annual Allowance
The April 2009 budget and the pre-budget report in December 2009, significantly restricted pension contribution tax relief for high earners. The Budget Statement on 24th March 2010 confirmed the details.
Anyone with income of £130,000 or more during the tax year that the contribution is made (or in one of the previous two tax years) is affected. The definition of income includes that from employment, self-employment or partnership income plus savings, dividends, rental income and pension income as well as some gains from life insurance policies and bonds an income from trusts. Some deductions are allowed including personal pension contributions up to £20,000, some charitable donations and trading losses – please ask us for details.
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| Squeezing pension contributions |
Protected Pension Input Amount
Those affected have two potential “protected pension input amounts” in respect of which the special annual allowance charge being imposed. These are either £20,000 or (effectively) the average pension contributions paid in the run-up to 22 April 2009 the amounts are protected and can continue to be paid. Any excess over the protected pension input amount is taxed, via the self-assessment tax return, to reduce tax relief from the maximum to basic rate, 20%. For an employee contribution the excess over the protected pension input amount would also be taxed via the employee’s employee’s self-assessment tax return.
Increases in Pension Contribution
Where a company pension contribution is expressed as percentage of salary the amount paid in is protected if it rises in line with salary increases but not if the percentage rate is increased. Any member contributions that form part of the contractual of employment can also rise in line with increases in salary.
Further Tax Charges in 2011
From 6th April 2011 individuals with a “high income” will face a tax charge on any pension provision made by or for them. There will be no protection of established regular contributions nor will there be a £20,000 protected amount. For practical purposes “high income” is £150,000 if an employer contribution is included although no employer contributions will be included if the relevant income is up to £130,000 a year. (From 2011, it will no longer be possible to deduct an individual’s own pension contributions or Gift Aid donations).
Personal contributions will be subject to a special tax charge that will effectively reduce the tax relief to 20% and for employer pension contributions it is appears, subject to clarification, that they will be added to the employee’s income for tax purposes with tax relief at a maximum rate of 20%.
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| Protecting your contributions |
The position for defined benefit (also called final salary schemes) is further complicated by the fact that contributions are determined by a funding rate that applies to all members of the scheme (or part of a scheme), rather than the individual. In general, it appears that during the transitional period, contributions are acceptable without any additional tax charge provided that neither the accrual rate nor scheme rules are altered. From April 2011, any increase in contributions made by or on behalf of the member will attract a tax charge as for defined contribution schemes.
These notes are based on our current understanding of the rules; until tested by HM Revenue & Customs practice, it will not be possible to give definitive guidance.
The need for professional advice in pension planning is even more important than before. In fact, it is important always to seek independent financial advice before making any decision regarding your finances. If you would like to discuss whether your current arrangements are suitable, or require any other information about employee benefits, please contact us.
THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE; YOU MAY GET BACK LESS THAN YOU PUT IN. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE.
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