More Proposed Change To Pension Tax Relief!
Background
In the 2009 Budget, the Labour Government announced that those on incomes of £150,000 or more would have tax relief on their pension contributions reduced from 6th April 2011. In effect tax relief was to be tapered down from 50% at £150,000 to 20% at £180,000.
Complex transitional rules were brought in for tax years 09/10 and 10/11 to prevent individuals gaining a tax advantage by manipulating income and pension contributions in advance of April 2011.
New Coalition Government – all change!
After consulting with the industry, the Treasury has just issued an up-date to it’s plans as follows:-
Annual Allowance:- this will reduce from £255,000 to £50,000. This includes employee and employer contributions combined. Contributions in excess will be subject to a reclaim of tax relief. Members of final salary schemes accruing benefits will have increases in benefits assessed by ‘factoring’ to determine the actual ‘contributions’ being made.
Rate of tax relief:- higher rate tax payers will continue to receive 40% relief and additional higher rate tax payers 50%.
Offset:- individuals will be able to offset contributions exceeding the annual allowance against unused relief from the previous 3 years.
Repayments:- any tax charges due may be taken from the pension scheme directly or rolled-up to the point that benefits are taken rather than charging individuals directly.
Removal of last year flexibility
Under the existing rules, in the last year of earnings the annual allowance could be ignored with full tax relief on up to 100% of earnings even in excess of the limit. This option is being removed.
Lifetime allowance cut
From April 2012, the lifetime allowance will be reduced from £1.8M to £1.5M. Individuals who have already registered pension protection under the existing rules by 5th April 2009 will continue to have this applied. A new form of protection, called the Pension Growth Protection, may be introduced on which further details are awaited.
Conclusion
The proposals, of course, are aimed at restricting tax relief although for the vast majority they will not be affected. Even for individuals who wish to contribute more than £50,000, the ‘carry-forward’ of unused relief, if available, for the previous 3 tax years should be a valuable tool allowing for such flexibility.
Should you have any queries or wish to discuss any of the points raised, please contact Jeff Crewdson on 0161 477 6789.
Date of Article: 22nd October 2010
