It has long been expected that the rate of tax relief on pension contributions would be restricted to the basic rate for higher earners. This has now been announced to come fully into effect from 6 April 2011. However, there are some interim measures that apply immediately. The key points of the new rules are set out below.

New regime from 6 April 2011

With effect from 6 April 2011, the Government plans to restrict the income tax relief on pensions contributions for anyone with taxable income of £150,000 or more.

Tax relief will be tapered down for those with incomes between £150,000 and £180,000 so that effectively it will be worth 20% for incomes over £180,000 which is the same as it is for a basic rate taxpayer.

Example 1

Brian has income of £145,000 in 2011/12 and makes pension contributions of £50,000. 

He will obtain higher rate tax relief on his contributions as his earnings are less than £150,000.

Example 2

Angela has income of £190,000 in 2011/12 and makes pension contributions of £50,000.

She will obtain basic tax relief only as her income exceeds £180,000.

Special Annual Allowance (applies from 22 April 2009 to 5 April 2011)

Between 22 April 2009 and 5 April 2011 special provisions will apply. Tax relief on contributions will be limited for individuals: 

• With income in excess of £150,000 in the tax year, or any of the preceding two tax years; AND
• Who increase the level of their regular ongoing pension contributions from the levels before 22 April 2009; AND
• Who make total pension contributions in excess of £20,000 in the tax year.

For such individuals a 'special annual allowance' will apply to set a limit on the pension contributions paid in the tax year that will obtain maximum tax relief. This allowance will be the greater of £20,000, or the 'protected pension input'. The protected pension input is the level of the regular ongoing pension contributions as established before 22 April 2009 (as below). Tax relief on pension contributions above that level will be restricted effectively to the basic rate by the application of a special annual allowance tax charge to recover the tax relief obtained above the basic rate of tax relief.

We only need to consider the protected pension input if you have already been making regular ongoing pension contributions before 22 April 2009 which exceed £20,000. This will be potentially very valuable as this will set the limit on the pension contributions that obtain maximum tax relief in the period 22 April 2009 to 5 April 2011. 

Regular ongoing contributions are the normal level of your pension contributions that you have made at least on a quarterly basis before 22 April 2009. This means that regular annual lump sum payments would not count towards the protected pension input.   

For example, if you have made regular monthly pension contributions totalling £30,000 in 2007/2008 and 2008/2009, this should count as your protected pension input. This would mean that you could contribute another £30,000 on this basis in 2009/2010 that would not exceed the protected input and would qualify for maximum tax relief.

Example 3

David has income of £160,000 in 2008/09 and £145,000 in 2009/10. He makes pension contributions of £15,000 in 2008/09 and £25,000 in 2009/10.

He is subject to the special annual allowance tax charge in 2009/10 as his income exceeds £150,000 in the preceding tax year. He has increased the level of his pension contributions in the year, and the total exceeds £20,000. The charge applies to the excess of £25,000 over £20,000.

Example 4

Ann has income of £200,000 in 2009/10. She makes regular monthly pension contributions totalling £50,000 in the year and also made similar contributions in 2008/09.

She is not subject to the special annual allowance tax charge as although her income exceeds £150,000 and total contributions exceed £20,000, she has not increased the level of her regular contributions.

Example 5

Paul has income of £160,000 in 2009/10. He makes a pension contribution of £15,000 in the year, having made no previous contributions.

He is not subject to the special annual allowance tax charge because whilst his income exceeds £150,000 and he has increased the level of his regular contributions, his total contributions are less than £20,000.

There are many points of detail in these interim rules and therefore each individual case would need to be considered on the basis of all relevant facts. 

It should also be stressed that these rules fall away from 6 April 2011 and from that date there will be no limit of £20,000, or the protected pension input, that will continue to obtain higher rate tax relief where earnings exceed £150,000.

Comment on this blog in the space provided below. Barry Hallam is a Tax Manager at Mercer & Hole. 

• Email This
• Print
• Comments
• Trackbacks

The Government has issued details of the new “Saving Gateway” initiative that it hopes will encourage people on low incomes to save for the future.

From 2010, accounts will be available to people receiving a range of benefits and allowances; those who are eligible to open an account will be sent details and an application form, in time for it becoming available.

The amounts that may be saved are modest – the maximum monthly contribution is £25 per account.

The Government has undertaken to contribute 50p for every £1 saved, after two years, which presumably means that the maximum Government incentive will be £300 per account.

The initiative is certainly laudable. What is questionable is the amount of bureaucracy that will undoubtedly be involved for what will be very modest sums.
 

• Email This
• Print
• Comments
• Trackbacks

In a recent case, the Special Commissioners decided that a couple who allowed their three young daughters to acquire shares in the parents’ company at less than market value, should be taxable on dividends paid on the daughters’ shares.

The circumstances of the case were not straightforward, as the parents claimed (but failed to prove) that the share purchase was in some way linked to a loan made to the company but the facts appear to be:-

1. The parents set up a new company in which each subscribed £1 for one ordinary share.
2. Some months later, when the company was trading profitably, a further 98 ordinary shares were issued for £98 to both parents (19 shares each) and the three daughters (20 shares each).
3.  Each year until the company ceased trading, dividends were paid on the 100 issued shares.

Where children under 18 have income of more than £100 that stems from gifts from their parents, the income is treated for tax purposes as belonging to the parents.

In this case, the Special Commissioners decided that the parents had effectively gifted the right to dividends to their daughters (and would not have done the same for a third party) and that the income therefore belonged to the former.

Had the parents been able to show a commercial link between the loan and the issue of the shares, it is quite possible that the outcome would have been different. Yet further proof that documenting what you are doing – and why – is of paramount importance when dealing with the Revenue.

• Email This
• Print
• Comments
• Trackbacks

There seems to be a lack of knowledge about the proposed Pensions Act 2008 and the new requirements it will impose on employers from 2012.

I know this is not an immediate problem but there are a few things that may need to be considered in advance:-

• Not all employers currently pay into pension schemes for their employees.
• Not all employees have joined the pension schemes provided.
• From 2012 all employees aged 22 and over earning more than £5,035 (in 2006/07 values) who are not in a workplace pension scheme with compulsory contributions from their employer will be ‘auto-enrolled’ into one.
• The responsibility for making this happen will rest with the employer.
• If an employer does not have a ‘Qualifying Workplace Pension’ scheme in place by 2012 they will have to ensure their employees are auto-enrolled into a default scheme that the Government is setting up.
• Employers who do not comply will be subject to ‘compliance notices’, ‘penalty notices’ and, quite possibly, fines.
• Employers will be compulsorily required to pay contributions of 3% of their employees’ earnings (between a lower and upper threshold) towards their pensions while they are members of ‘Qualifying Workplace Pension’ schemes.

 

• Email This
• Print
• Comments
• Trackbacks

Over the last 24 hours there have been a number of blogs posted in relation to the 2008 Budget announcement – on both SME Plus blog and our sister blog Tax Plus blog.

For your reference and convenience please find below a list of the respective blogs posted:

SME Plus

Budget 2008 - Pension Tax Relief
Budget 2008 - Capital Allowances
Budget 2008 - Enterprise management incentives ("EMI") share options
Budget 2008 - VAT
Budget 2008 - Trade losses for individuals...
Budget 2008 - Pensions
Budget 2008 - Associated companies
Budget 2008 - ISAs
Budget 2008 - Income shifting
Budget 2008 - Corporation tax simplification...
Budget 2008 - Enterprise Investment Scheme
Budget 2008 - Previously announced

Tax Plus

Budget 2008 - All Settled Offshore?
Budget 2008 - The Remittance Basis - Offshore Mortgages
Budget 2008 - Non Doms and Capital Losses
Budget 2008 - Personal allowances and the remittance basis
Budget 2008 - Non Doms and the £30,000 charge for the remittance basis
Budget 2008 - VAT
Budget 2008 - Changes to taxation of foreign dividends
Budget 2008 - Relaxation on Residence Test and Day Counting Rules

• Email This
• Print
• Comments
• Trackbacks

The previously announced reduction in basic rate income tax from 22% to 20% from 6th April created concerns for 2 sectors.

Firstly, charities were concerned that they would lose out because Gift Aid donations would only benefit from 20% income tax relief with a resulting reduction in the gross donation.

Secondly individuals making personal pension contributions would only benefit from 20% tax relief at source instead of 22%. For instance a personal pension contribution of £78 would be worth £100 after basic rate tax relief in 2007/08. After 6th April the same £78 contribution becomes £97.50 after basic rate tax relief. This represents a small but significant reduction in your pension fund. Higher rate tax payers can claim back a further 20% through self assessment, increased from the previous 18% but the gross pension premium is still reduced for the same initial investment.

It was pleasing to see the Chancellor act on the concerns of charities and add 2% relief to Gift Aid donations for a transitional period.

It was a shame that the same generosity was not extended to the millions of us trying to save for our retirement.

• Email This
• Print
• Comments
• Trackbacks

There appear to be no dramatic new announcements relating to pension planning in this budget. As previously announced the annual allowance increases to £235,000 for 2008/09. The lifetime allowance becomes £1,650,000.

Individuals who have not reviewed their pension arrangements since the 2006 'Pension Simplification' should do so now. In particular transitional protection against the effects of the lifetime allowance can be applied for. The deadline for applying for this protection is 5th April 2009.

• Email This
• Print
• Comments
• Trackbacks

The budget confirmed previously announced increases to ISA allowances for 2008/09.  From 6th April individuals can contribute up to £7,200 in ISA. Of this up to £3,600 can be invested in cash. The remainder can be invested in Stocks and Shares. The old and confusing regime of Mini and Maxi ISAs will cease to exist after 5th April. Instead, the more appropriately labelled Cash ISA and Stocks and Shares ISA will be the terminology.

Individuals contributing the maximum amounts by direct debit may wish to review their arrangements.

• Email This
• Print
• Comments
• Trackbacks

The 2008 budget included possible incentives for individual savers and investors at two opposite extremes of the market.

Firstly the announcement of more consultation on the Savings Gateway to encourage lower income individuals to save regularly in deposit accounts. This was originally consulted on in 2001 and has been trialed since. We shall wait and see whether a scheme whereby the government matches an individuals savings will actually be implemented.

Secondly the governments want to simplify the Enterprise Investment Scheme (EIS) to encourage investment in smaller, high-risk trading companies. These schemes allow an investor to benefit from 20% income tax relief as well as CGT deferral for reinvestments and gains free of CGT where income tax relief has applied. The government wants to increase the limit for income tax relief from £400,000 to £500,000 for 2008/09. This will be subject to State aid approval. In addition a consultation to try to encourage more investment is to be undertaken. This consultation will focus on various matters but will include how to increase awareness of these schemes amongst investors as well as the possibility of carrying back tax relief being extended to carry forward.

• Email This
• Print
• Comments
• Trackbacks

This is a question asked frequently of advisers and the answer is usually straightforward in that it is normally better to invest than to see cash value eroded by inflation. However in times of extreme market volatility as we are currently experiencing, the answer is more difficult. The risks of investing appear higher now than they have for some time.

Short term volatility naturally makes potential investors nervous. Longer term market falls make investors even more nervous. Potential investors are generally tempted back into the markets when there is evidence of a sustained recovery. This may help investors to sleep at night but it may mean missing out on the best investment opportunities.

Many individuals like the thrill of trying to bag a bargain and will look to optimise the timing of investments. Some will win and some will lose. Most will both win and lose at different times. The majority of investors however have neither the time nor the inclination to make these timing judgements. They may leave decisions to 'experts' but in general these experts have a vested interest in investing. The best alternative is often to drip feed regularly into the market with little regard for timing or volatility.

Monthly regular saving allows you to gain from rising asset prices whilst benefiting from the purchase of more assets when prices are depressed. Those in our industry use the jargon - 'Pound Cost Averaging'. It is not exciting and it is not fashionable, but it allows you to accumulate wealth over the medium to long term. That sounds like an investment objective.

So is it a good time to save regularly? Almost certainly.

• Email This
• Print
• Comments
• Trackbacks

The tax benefits of personal pension funding are compelling.

However when the time comes for pension benefits to be realised many people are put off by the perceived lack of flexible options available. In particular the apparent lack of value available for other family members in the event of premature death can cause particular angst.
Continue Reading...

• Email This
• Print
• Comments
• Trackbacks

Our industry has an unfortunate reputation for shooting itself in the foot; it delights in finding new and ingenious ways of pulling the wool over the legislators and the treasury and then explodes in fits of outraged indignity when the government retracts from certain accepted practices and understanding. We have seen this of late, with some of the so called “Pension Simplification” legislation. 

The idea as I understand it, was to both simplify and relax pension rules, a laudable intent but the outcome sadly one year on from A day is anything but, as the government has sought to control an industry that has tried to turn such changes into sales opportunities, whilst at the same time going way beyond what the government intended.

Two examples for you. Firstly take the Alternative Secured Pension (ASP), this is a mechanism by which annuity purchase can be delayed after age 75 by utilising income drawdown (now called unsecured pension). The main reason the government will say that this was introduced, was to allow the “Plymouth Brethren”, a religious body who believe that annuities amount to gambling on human life because they are based on estimates of how long policyholders are likely to live …. You really can’t make it up can you! Well, within moments the industry had formulated over-enthusiastic strategies whereby pension pots for the over 75’s on death could be passed down to other family members and thereby circumnavigate Inheritance Tax, thus, the strategy of the “family SIPP” was born.

The treasury caught off balance were then deeply concerned that investors would opt for the ASP mainly because it allowed them to pass on assets when they died and predictably reacted with an inevitable clampdown to what they saw as abuse of a plan which was only intended for a few people of a certain religious belief.

The situation now, is that ASP is still available to all who are over 75 but the government watches and waits and maintains it’s position that it is still really only intended for the few and not the many!

And what of the clampdown, well there was the removal of the “death guarantee” but the change that drew most attention was the change whereby if you were to die under ASP and there are no dependants then any transfer, now called a Transfer Lump Sum Death (TLSDB) will no longer be an authorised payment and thus will be subject to an unauthorised payment tax charge of 70% and in addition an IHT levy of 40% will apply leaving a princely 18% left to be distributed.

Some would argue that this is punitive and beyond the pale but those of a different disposition may state “well something is better than nothing”. I will let you decide!

A second recent example, where industry over-enthusiasm has led to a government change of heart concerns the area of “Trivial Pensions”. It is my understanding from some reading in this area and from several very informative blogs that the government had planned to introduce simple rules when dealing with “trivial pensions”. The initial plan was that each pension scheme would be treated on its own merits. The concept was scrapped when some providers and advisers presented it as a tax planning opportunity for clients, to make payments, with tax relief, into several pension schemes and commute them all for cash. Unsurprisingly, the government clamped down on this and the final rules are as a result much more complex.

The changes involve ensuring the total pension funds for the individual are not more than 1% (currently £16,000) of the lifetime allowance (currently £1.6 million). This change is particularly regrettable, because in trying to benefit better-off pension investors, some in the industry have effectively made things much more difficult for those who will struggle to make ends meet in retirement.

We expect the government to behave responsibly in changing legislation, however, the industry must also ensure that it does not force the government’s hand by promoting ‘opportunities’ that we know it will find completely unacceptable.

What do you think?  Subscribe and join in with this and many other discussions today.

• Email This
• Print
• Comments
• Trackbacks

The government is currently facing a real headache with regard to the latest pension reform policy in the shape of a piece of European legislation.

The culprit is the Distance Marketing Directive (DMD), as this stops employers automatically enrolling their employees into contract-based pension arrangements, such as group stakeholder pension plans (GSHPs) and group personal pensions (GPPs).

No auto-enrollment means that these pension schemes would fail the new exempt scheme test under pensions reform, and employers instead would have to offer a trust-based scheme or (more likely) pay into personal accounts for their employees, come 2012.

Most observers would conclude that this would be a most unacceptable outcome.

GPPs are very popular within the industry and employers alike, and the take up of these plans is growing all the time as employers opt out of the more onerous trust-based defined contribution and benefit occupational schemes in favour of them.

Thankfully the Minister of State in charge of Pension Reform a certain James Purnell is well aware of the problem and sympathetic to the potential problems (as he alluded to at the Financial Adviser expo this May), but and there is always a but, he has at present no clear idea of a way forward. He is of course taking advice!

But the question is, how can a fix be found?

It may be possible for the Department of Work and Pensions (DWP) to look at this piece of legislation and push to have it amended to allow auto-enrollment into GPPs and GSHPs while still meeting the principles of the Directive. Or, perhaps some other way at a more grass route level, involving the employee giving their prior consent to an employer.

One thing is clear however; allowing GPPs and GSHPs to pass the exempt scheme test is a problem that must be sorted.

Suggestions on a postcard! 

• Email This
• Print
• Comments
• Trackbacks