News
March 2010
Planning for the New Pension Restrictions
Following next month’s tax rises for high earners, April 2011 will see restrictions on how much tax relief some higher-rate taxpayers can claim on their pension contributions.
In the 2009 budget, it was announced that those earning over £150,000 would begin to lose the higher-rate tax relief on their pension contributions on a tapered basis, so that those earning over £180,000 or more would only get relief at the basic rate of tax (20 per cent). To stop people getting around these new limits by making unusually large contributions in the meantime, further restrictions have since been announced, stating that higher-rate tax relief will only apply to contributions of up to £20,000 per year, unless higher contributions were already being made on a regular basis. In response to concerns that the criteria for ‘regular’ contributions (at least quarterly) discriminated against the self-employed who made annual contributions, the government has shifted its position to allow ‘irregular’ contributions, subject to a cap of £30,000, averaged out over the previous three tax years.
Some high earners were planning to get around the restrictions by using workplace salary sacrifice schemes to reduce their earnings below the £150,000 threshold and have their employers make pension contributions in lieu of salary, but in last year’s Pre-Budget report, the Chancellor closed that loophole by stating the restriction on tax relief would apply to all pension contributions, including those funded by an employer, subject to an income floor of £130,000.
Anyone who is already making higher contributions, and has been doing so for at least the last three tax years, may continue to do so until 2011, without incurring the anti-forestalling restrictions, and in most cases it would make sense to continue to do this while possible. High earners who do not have regular past contributions to refer to should make the most of the £20,000 limit for contributions, while it is in place.
The reduction in tax relief will, of course, mean less money going into individuals’ pension savings, and it would be sensible for anyone in that position to review their plans for their retirement and ensure they are still making enough provision. For more information please contact us.
