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High earners: Transitional restrictions on tax relief
In the 2009 Budget, the Chancellor announced that tax relief on pension savings would be restricted from 6 April 2011 for individuals with an annual income of £150,000 or more by tapering away tax relief so that for those earning over £180,000 it would be worth just 20%. To prevent high earners from making extraordinary contributions in the interim, transitional restrictions on tax relief came into effect from 22 April 2009. These transitional restrictions were extended on 9 December 2009.
The Budget on 22 June 2010 confirmed that restricting tax relief on pension savings for high earners will go ahead from 2011. However, on the grounds that the original proposal was unnecessarily complex, the Coalition Government is seeking an alternative approach (for further details, see High earners: The Coalition's alternative proposal for restricting pensions tax relief). For the time being, the transitional restrictions will remain in place.
The transitional restrictions
Broadly, those affected by the transitional restrictions will be individuals who:
- have an income of £150,000 (or £130,000*) or more;
- change the pattern of their normal, regular, ongoing pension savings; and
- whose overall annual pension savings exceed £20,000 (or up to £30,000 for those who have paid "infrequent money purchase contributions") (the “special annual allowance” (SAA)).
*The 2009 Pre-Budget Report extended these measures. Individuals who have an income of £130,000 or more will also be caught if they change the pattern of their normal, regular, ongoing pension savings on or after 9 December 2009.
Where the above applies, there will be a tax charge (SAAC) designed to restrict the tax relief given to 20%.
Impact on existing arrangements
Normal, regular, ongoing pension savings (known as "protected pension inputs") are, broadly, an individual’s ordinary pension savings made under arrangements that were in place before these changes were brought in.
For defined contribution arrangements, these include contributions paid under agreements made prior to 22 April 2009 (or 9 December 2009 for those earning between £130,000 and £150,000) that are paid on a "quarterly or more frequent basis" and at a rate that does not increase (otherwise than as agreed before 22 April 2009 or 9 December 2009 for those earning between £130,000 and £150,000).
Protected pension inputs for defined benefit arrangements include any increase in pension benefits which arise under the pension scheme rules as at 22 April 2009 (or 9 December 2009 for those earning between £130,000 and £150,000). Any increase in benefits resulting from normal pay rises and progression will also be protected.
The Finance Act 2009 contains anti-avoidance provisions intended to render ineffective schemes which are designed to avoid or reduce liability to the SAAC.
The SAAC is payable by the individual via their self assessment tax return.
Interaction with the annual allowance
The existing annual allowance (£255,000 for the tax year 2010/11) will run alongside the new SAA. In the event that both are exceeded, the SAAC will be adjusted to avoid double recovery of tax relief.
Refunds of contributions
In the event that a member inadvertently makes a contribution which exceeds the SAA, a refund of the excess may be made (if permitted by the pension scheme rules). Any such payments made by a pension scheme will need to be reported to HM Revenue & Customs on the Accounting for Tax return.
Author: David James