The Government is coming under increasing pressure from business groups and accountants to reverse the planned reduction in tax relief on pension contributions, which is due to come into effect in April 2011.
In the 2009 Budget, the former Chancellor of the Exchequer Alistair Darling announced that the Government would restrict the availability of pensions tax relief for high earners from 6 April 2011. The aim was to ensure that tax relief is available only at the basic rate for individuals with annual gross incomes or more than £180,000. The value of employer pension contributions made on behalf of an individual would also be caught by the restrictions. This measure was passed by Parliament, without scrutiny, just before the House of commons was dissolved for the general election.
Key points:
1. Tax relief available for pension saving by individuals with annual gross incomes of £150,000 or more will be restricted (“gross income” includes the value of employer contributions to money purchase schemes, or the annual increase in value of defined benefit accruals);
2. A floor of £130,000 in annual pre-tax “relevant income” will apply, not including employer contributions or defined benefit accruals;
3. Tax relief will be reduced from 50 to 20 per cent for individuals with annual gross incomes of between £150,000 and £180,000, at a stepped rate of 1 per cent of relief for every £1,000 of gross income. For individuals with gross incomes exceeding £180,000, relief will only be available at the current basic rate of 20 per cent;
4. Further accruals in defined benefit schemes will be valued using a prescribed scale of two-way age-related factors (reflecting age and normal pension date);
5. The restriction of relief will not apply to contributions or accruals made in the tax year an individual dies or commutes his or her entire pension on grounds of serious ill-health;
6. Employers will be required to identify all employees earning £130,000 or more in a tax year and request benefit statements for them from pension scheme trustees; and
7. Under a “scheme pays” option, individuals facing recovery charges of £15,000 or more in a tax year will be able to require their scheme to pay the charge and deduct a corresponding amount from their benefits. The “scheme pays” mechanism will be implemented in the Finance Bill 2011.
The changes to pension tax relief (and the subsequent impact they will have) have largely ‘fallen below the radar’ of many high-earners, as the recent controversy surrounding expected capital gains tax rises has taken prominence. However, the CBI and the Institute of Directors, along with accountancy firms, have now called on the Government to reassess these measures before they take effect. It will be a case of ‘wait and see’, but, in the meantime, high earners need to ensure that they are aware of this tax change and that they take it into account in their pension planning.
UPDATE: In tomorrow’s emergency budget (22 June), the Government may announce its intention to amend, or even scrap, the previous administration’s plans for pension tax relief. We do not have long to wait to find out…