This Law-Now confirms the changes in the 2009 Budget that impact on occupational pension schemes.
Restriction of higher-rate tax relief
The main headline in relation to pensions is the restriction of tax relief for the highest earners. From April 2011, for those individuals with income of £150,000 or more, tax relief on pension contributions will be tapered downwards so that it falls to 20% for those with income over £180,000. The full details of how this tapering will work are subject to consultation.
Effective from noon on 22 April, however, the Government is introducing what it calls anti-forestalling legislation to prevent the making of "substantial additional pension contributions" before April 2011 by individuals likely to be affected by this change. Anti-forestalling will apply to individuals with income above the £150,000 threshold who change their normal pattern of pension contributions and whose pension savings exceed £20,000 per tax year (a sum to be known as the "special annual allowance"). Above this special annual allowance, tax relief on pension savings will be at the 20% basic rate only (the "special annual allowance tax charge" by which relief is restricted to basic rate is a charge on the individual, collected via their self-assessment tax return).
At this stage, some important points to note include:
- for these purposes, pension savings means all savings in registered pension schemes, whether made by the individual, on their behalf or by their employer, including benefits accrued in DB schemes and all contributions made to DC arrangements. In particular, there could be implications for the highest earners where pensionable salary or bonus increases have the effect of taking the value of benefits above the special annual allowance.
- it may not just be those with income of £150,000 in the current tax year who are affected: anti-forestalling could apply to those whose income met that threshold in either tax year 2007/08 or 2008/09.
- it will not be possible to circumvent the £150,000 figure by entering into new pension salary sacrifice arrangements (i.e. made following the Budget announcement) that would otherwise have the effect of reducing the individual's income to less than £150,000.
- other "creative" solutions may also be risky: the draft legislation includes a broad anti-avoidance provision which threatens to catch any arrangement "the main purpose, or one of the main purposes, of which is to avoid or reduce liability to the special annual allowance charge..."
Anti-forestalling: action required
If your scheme has members to whom the changes may be relevant, you should consider early communication to ensure that they are aware of the proposed scope of the legislation. Employers should also review the potential effect on any imminent pensionable salary or bonus increases for the highest earners.
In the longer term, pension schemes will need to consider the administrative implications, and whether any rule amendments are required. However, it is important to note that the legislation is still in draft, and may be subject to change until the Finance Act 2009 is enacted, probably this summer.
Other tweaks
Recent Budgets have heralded a number of substantive changes concerning pension schemes, such as improvements to the Financial Assistance Scheme (FAS) and corrections to the post-"A Day" pensions tax regime. This year, however, the other pensions changes are limited and should be uncontroversial:
- legislation will be introduced to allow payments paid by FAS to be given broadly the same tax treatment as if they had been made by a registered pension scheme;
- similarly, regulation-making powers will be granted to ensure that where the Financial Services Compensation Scheme (FSCS) assists an insurance company, there will be broadly the same tax treatment for the resulting payments as if the FSCS had not intervened;
- as already set out in legislation, the annual allowance is confirmed at £245,000, and the lifetime allowance at £1,750,000, for 2009/10.
The full Budget report and related documents are available from the Treasury website or from HMRC's own Budget microsite, which contains the draft anti-forestalling legislation and more detailed guidance.