Pensions

Restrictions on higher rate tax relief from April 2011

A consultation paper was issued alongside the Pre-Budget Report setting out how the restrictions on higher rate tax relief for pension contributions are to operate from 6 April 2011, when the anti-forestalling measures announced in this year‘s Budget end. The details of the proposals differ from what was previously suggested:

• Where the individual has a total ‘pre-tax income’ of less than £130,000, the new restrictions will not apply. In calculating the ‘pre-tax income’, there is no deduction for the individual’s own pension contributions or any charitable donations.
• The restriction then only applies if the individual’s ‘pre-tax income’ including any employer’s contributions exceeds £150,000.
• Tax relief on all pension contributions will effectively be tapered down from higher rate tax at an income of £150,000 to basic rate (20%) at an income of £180,000.

For defined benefit (final salary) schemes, the consultation document favours the use of age-related factors to place a contribution value on the annual increase in benefits, rather than the flat 10:1 multiple that currently applies.

Restrictions on higher rate tax relief from 9 December 2009

The proposed restrictions from 2011/12 have prompted changes to the current anti-forestalling rules. The income definition for the £150,000 threshold will include the value of employer pension contributions. Tax relief for those with incomes below £130,000 before the inclusion of employer pension contributions will not be restricted.

These changes apply to contributions paid under defined contribution schemes or increases in rights accrued under defined benefit schemes on or after 9 December 2009.

Pension tax charges from 6 April 2010

• Short service lump sum refunds to employees of contributions to registered pension schemes will be subject to 20% tax on the first £20,000 and 50% on the excess.
• The tax charge payable on certain lump sums from Employer Financed Retirement Benefits Schemes (EFRBS) to an entity that is not an individual will increase to 50%.
• The rate for the special annual allowance charge on excess pension contributions where the pension scheme member has an income of at least £130,000 will rise from 20% to ‘the appropriate rate’. This is the rate necessary to reduce the effective amount of pension contribution tax relief to 20%.

State pension increases

From April 2010, the basic state pension will increase by 2.5% to £97.65 a week for a single person and £156.15 a week for a married couple.