Restricting tax relief on pension contributions for high-income individuals

Roger-the-Dodger

“Restricting tax relief on pension contributions for high-income individuals – comparisons between the anti-forestalling rules and the proposed changes from April 2011

At Budget 2009, the Government announced its intention to bring in new rules for pensions tax relief to apply from 6 April 2011. At the same time, the Government introduced new rules (known as anti-forestalling rules) that apply from 22 April 2009. These anti-forestalling rules are intended to prevent people making substantial additional pension contributions, taking advantage of the full tax relief available, before the changes in 2011 come into force.
At the Pre-Budget Report 2009, a consultation document ‘Implementing the restriction of pensions tax relief’ was published which set out how the restriction of higher rate tax relief will be implemented in 2011.


Also at the Pre-Budget Report the existing anti-forestalling income threshold was reduced from £150,000 to £130,000 with effect from 9 December 2009, although the income definition was unchanged”


Dear folks

In the financial year 2010 - 2011, I will be taking voluntary redundancy on November 30th 2010.

The redundancy payment on the 1st Dec will be £126,000, and my gross income from work will be £3.5 K per month for 8 months .April to November 2010 inclusive..= £28 K
plus 4 months of final salary pension..= £8k. (December to March 2011) My salary and pension contributions have been similar over the last 30 years (apart from pay rises) My current salary is £42,000 (approx 3% less the preceding two years ) with pension contributions of about 6%.
My gross income for 2010-2011 will therfore be £162,000

I intend putting £96,000 into my pension scheme and keeping £30k tax free. Does this then give me a total of £132,000 and will I be liable for tax under the "restrictions of pension tax relief"

I will be taking a tax free lump sum from my pension of £160,000 on December 1st 2010 and will receive a pension of approx £22,000 pa

I am totally confused now over all these changes, can anyone offer advice or help?

Many thanks

Dead_keen

I'll give it a go:

1. Your total income will include the taxable part of your redundancy payment (it would also include any benefits in kind, interest received, property income, etc).

2. Your total income will therefore be more than £130,000 (being £28k + £8k + £126k - (potentially) £30k) and so you would appear to be caught by these rules.

3. You then need to work out how much of the £20k limit you have already used. This depends on what your final salary scheme is like. If it is a one-sixtieth scheme it would be something like £4,667 (1/60x42,000x8/12x10) but it really does depend on your own circumstances. So, on this basis you could make an extra £15,333 of extra pension contributions without being caught by the new rules.

4. So, if you pay £96,000 extra contributions, that is £80,667 above the limit. The rate is currently 20% so that would mean that you would have to write a cheque for £16,133 in January 2012. However, in the PBR, they announced that the 20% rate would be changed to an "appropriate rate". In your case, this is likely to still be 20% but if you have other income so that you become a 50% taxpayer, it will be a higher effective rate.

5. It's therefore up to you whether you want to make the extra pension contributions. You are effectively only getting 20% tax relief on them which isn't too bad as you will probably only have a 20% marginal tax rate going forward. But you will be locked into an annuity.

6. You could think about whether there are other things you could do. If you were that close to the £130,000 limit (and you have just got a huge redundancy payment), what would happen if you decided not to take a pension until a bit later? If you left it until after 5 April 2011, on these numbers you would have less than £130,000 of total income and so not be caught by these rules at all. But if you go £1 over the £130,000 limit, you will pay an extra £16,000 of tax. That's quite a high marginal rate!

7. These new rules are complicated and so I may have got it wrong.

Roger-the-Dodger

Many thanks for your help , and a Happy New Year to you :beer:

I thought about deferring my pension till 1st april 2011 which would reduce my income for the financial year by £8K. My pension scheme company give me the option to defer to a later date if I wish .I understood I had to take my pension in the same financial year or I would incur the same tax penalties as it would be construed as trying to avoid the tax :rolleyes:

I thought wrongly, that maybe my gross earnings £162K minus my non taxable personal allowance of £6470 and the £30K tax free from my redundancy lump sum would bring me down to around £125,500 and avoid the tax hit. The 30K and £6470 being "qualifying reliefs"
This quote from HM revenue website explains relevant income and then gross income,also these only apply to taxable income of which I thought mine was £125K or there abouts which confuses me even more:rolleyes:

2011 Changes

[FONT=Arial,Arial][FONT=Arial,Arial]Individuals will be affected by the restriction of tax relief on pension contributions from 6 April 2011 if their ‘gross income’ is £150,000 and over and their ‘relevant income’ is £130,000 and over. [/FONT][/FONT]
[FONT=Arial,Arial][FONT=Arial,Arial]For the purposes of the 2011 changes the definition of ‘relevant income’ is as follows: [/FONT][/FONT]

[FONT=Arial,Arial][FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]the individual’s total taxable income for the year [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]plus any pension contributions they make under net pay (and corresponding relief) and any amount paid under payroll giving [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]less any qualifying reliefs, but excluding any gifts of qualifying investments to charities [/FONT]
[FONT=Arial,Arial] [/FONT]
[FONT=Arial,Arial]plus any salary sacrifice made to provide pension benefits to the individual during the year agreed since 22 April 2009. [/FONT]
[/FONT]
[FONT=Arial,Arial][FONT=Arial,Arial]Income definitions December 2009 [/FONT]
[/FONT]

[FONT=Arial,Arial][FONT=Arial,Arial]For the purposes of the 2011 changes the definition of ‘gross income’ is as follows [/FONT][/FONT]

[FONT=Arial,Arial][FONT=Arial,Arial]the individual’s total taxable income for the year [/FONT]
[FONT=Arial,Arial]plus any amount under payroll giving and any pension contributions they make under net pay (and corresponding relief) [/FONT]
[FONT=Arial,Arial]less any qualifying reliefs, but excluding any gifts of qualifying investments to charities [/FONT]
[FONT=Arial,Arial]plus the total pension savings amount of the individual (including employer contributions), excluding any relievable contributions made by or on behalf of the individual[/FONT]
[/FONT]

Cook_County

Are you sure the £30,000 is tax-free? If you know 11 months in advance I would expect HMRC to say that this is either non-contractural or an additional taxable paymen made on retirement. What legal advice have you had on this question?

Roger-the-Dodger

I have not had any legal advice. Merely a letter from my employer ( 20 others are accepting VR also) a year ago confirming acceptance of my Voluntary redundancy, and a letter in Oct 09 stating the new legislation and that it would only affect those earning 150k > gross, and that the first 30k from my VR money would be tax free. My employer also stated that the rules may change, and they have......for the worse :mad:

The rules concerning this are anti-forestalling and apply retrospectively

At Budget 2009, the Government announced its intention to bring in new rules for pensions tax relief to apply from 6 April 2011. At the same time, the Government introduced new rules (known as anti-forestalling rules) that apply from 22 April 2009

Cook_County

Given the amounts involved you would be wise to seek advice from an employment lawyer on the redundancy issues and from tax counsel on the tax issues as they are certainly not clear cut.

The employer is seeking advice to protect itself - this is of little value to you. Indeed getting good advice now from a lawyer who has handled hundreds of similar situations may mean that you get you more money or more favourable terms given that an experienced lawyer would know what else other employers offer or simply best practice wording to protect your interests.

Roger-the-Dodger

Thanks for the advice.

My union was heavily involved in these negotiations, so I may ask them to take up my case and the other 20 employees who are all going under the same terms and conditions, almost identical to mine

Dead_keen

Roger-the-Dodger wrote: »

I thought wrongly, that maybe my gross earnings £162K minus my non taxable personal allowance of £6470 and the £30K tax free from my redundancy lump sum would bring me down to around £125,500 and avoid the tax hit. The 30K and £6470 being "qualifying reliefs"
This quote from HM revenue website explains relevant income and then gross income,also these only apply to taxable income of which I thought mine was £125K or there abouts which confuses me even more:rolleyes:

Sorry, but you have illustrated the dangers of relying on summaries of complex legislation perfectly.

You should be even more careful about believing what is said on internet forums. The vast majority of people who comment on this sort of stuff know only what they have heard in the pub (and that includes many so called tax specialists). Saying that though...

The legislation refers to "total income" rather than "taxable income". Total income is before deducting personal allowances.

"Qualifying reliefs" is not a term used in the legislation. Instead, there is a list of provisions which are not relevant to most people (basically, different types of loss relief).

If you are entitled to the £30k exemption then this would reduce your employment income and so wouldn't be part of your total income.

You say that not taking your pension in the tax year would be construed as avoiding tax. You are right that there are anti-avoidance rules that apply to ignore a scheme or arrangements whose main purpose is to ensure that you are below the £150,000 limit (now to be £130,000). Whether there is one is a question of fact. You could imagine a situation where someone's pension pays out automatically at 65 and that person says "hey, I'm going to be caught by these new rules so please defer my pension for six months". That person may well be caught by the anti-avoidance rule. On the other hand, you could have someone who is 62 and whose pension scheme normally pays out when they are 65. That person could ask for an early (reduced) pension straightaway or they could wait until they are 63 or 64 before asking for an early (reduced) pension or they could wait until they are 65 and get it automatically. I don't think that choosing not to take a reduced pensions early could be said to fall in the anti-avoidance rules. However, this is written on an internet forum so you shouldn't believe what I have just written.

If you want to read more, you can look at the 113 pages of guidance that HMRC has published on these new rules (this guidance does not take account of the changes announced in the PBR). As a new poster, I am not allowed to post a link to it but if you Google "hmrc.gov.uk/pensionschemes/chapter15v2.pdf" you'll find it. In fact, you will find it just as well if you put a "www." in front of it.

Alternatively, you can take a look at the underlying legislation (use Google to find Schedule 35 FA 2009, s23 and s24 ITA 2007 and s403 ITEPA 2003) and the PBR notes (PBRN18 and 19).

Whatever you do, take advice from someone who knows about this stuff. To me, paying an extra £16k of tax for just being £1 over the £130,000 limit means (i) the legislation is stupid and ill-thought through, and (ii) you are... "unlucky" (or something).

From my experience, not many tax advisers know anything about these new rules (other than just the headlines) so choose carefully.

Roger-the-Dodger

Thanks again for a detailed reply. This is obviously a mine field for people like me, and for experts too. The fact that it keeps changing complicates things continuously.I will seek advice from a local Tax Accountancy firm and make sure, as best I can, that they are up to the task

thanks again

dickietruncheon

Not surprisingly I have read so much confusing and contradictory advise on the web in regard to this subject even from some of the leading UK financial and tax companies. Some say that the anti forestalling rules only apply to people with income over £130k. others say £150k and others say that it is the annual allowances that drive what relief is given (ie even if your income is below £130k you cannot save more that £20k (in some cases £30k). They cannot all be correct.

Ok - my simple question is:

My income this year is £100k. I would like to put it all into my SIPP thereby taking full advantage of the 40% allowance. Previous years income has never exceeded £130k. My payment patterns have always been irregular

Appreciate any views

Debt_Free_Chick

dickietruncheon wrote: »

Not surprisingly I have read so much confusing and contradictory advise on the web in regard to this subject even from some of the leading UK financial and tax companies. Some say that the anti forestalling rules only apply to people with income over £130k. others say £150k and others say that it is the annual allowances that drive what relief is given (ie even if your income is below £130k you cannot save more that £20k (in some cases £30k). They cannot all be correct.

The budget (April 09) introduced the charge to those earning more than £150k but the Pre Budget Report extended this - and the anti-forestalling provisions - to those earning more than £130k. Hence, the confusion.

Ok - my simple question is:

My income this year is £100k. I would like to put it all into my SIPP thereby taking full advantage of the 40% allowance. Previous years income has never exceeded £130k. My payment patterns have always been irregular

Appreciate any views

On the face of it, you will not be caught. But we still only have draft regulations and not final legislation. And these refer to "relevant income" which is income asssessed to tax. So you need to add in all other taxable income e.g. bank interest to arrive at your "relevant income".