The ink had barely had a chance to dry on the pensions ‘tax simplification’ measures introduced in April 2006 before the Chancellor announced plans, in his 2009 Budget, to introduce complex new rules that will restrict tax relief on pensions contributions for high earners. While the Treasury estimates that this measure will bring an additional £3m per year into government coffers, the cost for ordinary pension scheme members and the wider economy could be far higher.
How will the new restriction work?
From 6 April 2011 the government plans to restrict tax relief for individuals with an annual income of £150,000 or more. Tax relief will be tapered away so that for those earning over £180,000 tax relief will be worth 20%, the same as is available to basic rate taxpayers. Precise details of how this new restriction will work have not been published, as the government has said that it will consult on the details of these measures before they come into force. In the meantime, the Finance Bill 2009 contains so-called ‘anti-forestalling’ provisions, which are designed to prevent individuals from increasing their pension contributions in excess of their normal pattern in advance of the new restrictions coming into force.
‘Anti-forestalling’ provisions
The ‘anti-forestalling’ provisions began from 22 April 2009 and they will restrict higher rate tax relief on pension contributions for individuals:
- whose income is £150,000 or higher (in the relevant tax year or in any of the two previous tax years);
- who change their ‘normal ongoing regular pension savings’; and
- whose total pension savings (including their ‘normal ongoing regular pension savings’) exceed £20,000.
This new £20,000 limit on annual pensions savings will be known as the ‘special annual allowance’. The special annual allowance tax charge, which restricts relief on additional (ie non-regular) pensions contributions in excess of £20,000 to basic rate, is a charge on the individual, collected via their self-assessment tax return.
What are ‘normal ongoing pensions savings’?
The special annual allowance charge will apply only to increases to an individual’s normal regular ongoing pension savings from 22 April 2009 where the increase was not agreed before 22 April 2009. An individual’s normal regular ongoing pension savings will be known as ‘protected pension inputs’.
Under a money purchase arrangement an individual’s protected pension input will be:
- the annual amount of the individual’s total contributions to the arrangement before 22 April 2009, providing that the contributions were made at least quarterly (this requirement causes problems for individuals who have historically paid contributions on, say, an annual basis and it may be amended before the legislation comes into force); plus
- any increase in the individual’s regular contributions that was agreed before 22 April 2009.
Under a defined-benefit arrangement, all benefits accrued after 22 April 2009 will be treated as a ‘protected pension input’ provided that the way the individual’s benefits are calculated under the scheme rules does not change on or after 22 April 2009.
What about salary sacrifice arrangements?
In calculating an individual’s income for the purposes of the anti-forestalling provisions, any employment income forgone as part of a salary sacrifice arrangement will be ignored where the arrangement was entered into before 22 April 2009. However, for salary sacrifice arrangements entered into on or after that date, any income sacrificed under the arrangement must be added back when calculating an individual’s income.
True cost of this change
Although this restriction on higher-rate tax relief is targeted at high-income earners, it is middle- and lower-income earners who stand to lose the most. It is predicted that many directors and senior managers will stop participating in their company’s pension scheme as a result of this new restriction and this may hasten the decline of good quality schemes.
This restriction is also bad news for the wider UK economy, because at a time when the whole economy is in need of stimulation, much needed talent could leave the UK. The new restriction could also reduce the motivation and productivity of individuals earning around £150,000, who may refuse promotion or choose to work fewer hours to avoid the detrimental impact on their ability to save for their retirement.
Changes to the draft
At the time of writing the ‘anti-forestalling’ legislation is still in draft. Therefore, some of the details in this article may be subject to change.
By Anthony Arter, head of pensions, Eversheds LLP. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .