High Earners: Taxation and Pensions Changes 2009 - 2011

High Earners: Taxation and Pensions Changes 2009 - 2011

Background

In his Spring Budget statement of April 2009 the Chancellor of the Exchequer announced a number of changes to tax rates and allowances for taxpayers with income over £100,000. The Chancellor’s Pre Budget Report (PBR) for 20010/11was presented to Parliament on Wednesday 9 December. The PBRsets out the direction of Government policy in the run up to the 2010Spring Budget statement and includes planned changes to taxes, including their impact on pension schemes and their members.The PBR launches a national debate on issues such as taxes and pensions. Consultation on the PBR ends on 3 March 2010. The following information is based on the changes introduced under the 2009 Budget and proposals in the PBR of December 2009.

From 22 April 2009

Anti-forestalling measures and the Special Annual Allowance

As previously announced in the Budget statement of April 2009, new rules (known as anti-forestalling) applied from 22 April 2009. Their purpose was to prevent people making substantial additional pension contributions, taking full tax relief before the changes due in April 2011.

The PBR said that the “anti-forestalling” measures already in place will be amended from 9 December 2009 to reduce the earnings threshold from £150,000 to £130,000.

They will now apply to individuals:

• whose “relevant income” is £130,000 or over in a tax year (or any previous two tax years)

• who change their “normal ongoing regular pension savings” [1]

AND

• whose total “pension savings”in a tax year exceed £20,000 (or the lower of £30,000 and average contributions over the past three years, if contributions are less regular than quarterly)

These individuals will suffer a recovery charge on tax-relief,currently 20% (expected to rise to 305 in 2010/111), called the Special Annual Allowance Charge, which will be generally processed via their Self-Assessment tax return.

For the purposes of the charge, “relevant income” is:

• Total income subject to income tax, both employment related reward (i.e. after deduction of LGPS pension contributions, AVCs, ARCs etc, where tax relief is given under net pay arrangements) and other income

• Plus pension contributions and AVCs/ARCs made

• Less any qualifying losses (such as trading losses)

• Less deductions for pension contributions and AVCs/ARCs up to a maximum of £20,000

• Less any gift aid deductions

Members affected should therefore think carefully before changing their pension contributionsas this may lead to them receiving an income tax charge.

“Pension savings” are all of a scheme member’s pension savings that receive UK tax relief and includes savings in all registered pension schemes including:

• defined benefit schemes

• money purchase schemes (also known as defined contribution schemes)

• contributions paid both by individuals and anyone on their behalf and by employers

• savings in non-UK pension schemes that benefit from UK tax relief

From 6 April 2010

From 6 April 2010 there will be two changes:

• The individual Personal Allowance (on which no income tax is paid) will be gradually reduced to nil for individuals with “adjusted net incomes” above £100,000

For each £2 of income over £100,000, the personal allowance (£6,475 in 2009/10 for under 65s) will be reduced by £1.

• There will be an additional higher tax rate of 50 % for taxable income above £150,000

From6 April 2011

From 6 April 2011 there will be further changes:

Higher rate tax relief for individuals with an annual income of £150,000 or more will be tapered away so that for those earning over £180,000 relief will be worth 20%

Tax relief on pension savings will be tapered away so that for those earning £180,000+ will be restricted to 20% (basic rate).

There will be a sliding scale from 50% (additional rate) to 20% (basic rate) relief on pension savings for individuals earning £150,000 to £180,000.

The definition of earnings for these purposes will include the value of pension benefits or at least the value as funded by the employer – essentially treating employer contributions as a benefit in kind. The method of valuation is still under consultation by the tax authorities, there are a number of possible approaches.

Lifetime Allowance and Annual Allowance figures

As announced in the Budget statement of April 2009, the Lifetime Allowance will be maintained at the 2010/11 level of £1.8 million for a further five years, up to and including 2015/16. The Annual Allowance will also be held constant at £255,000 over the same period.

The information given here represents LPFA’s understanding of the main relevant changes and is only a general guide. It does not cover every detail of the changes, cannot cover every individual circumstance and some details are still subject to consultation.LPFA is not authorised to give financial advice and any member who thinks they may be affected by the changes should seek independent financial advice.

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[1]Normal ongoing regular savings do not include increases due to a reasonable pay rise or promotion or regular additional contributions in place before 22 April 2009 or before 9 December 2009 for those affected by the £130,000 limit; but will include employer awards or member purchase of additional membership or pension made from those relevant dates.