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Restricting pensions tax relief: Options for payment of tax
On 14 October 2010, the Government published its plans for restricting pensions tax relief. These included its decision to reduce the Annual Allowance (AA) from £255,000 to £50,000.
The Government anticipates that most individuals and employers will want to adapt their pension saving behaviour and remuneration terms to ensure that their pension contributions remain below the AA. However, some individuals may still exceed the AA, particularly if they are long-serving members of a defined benefit scheme with a generous accrual rate. The Government notes that, in some cases, it is feasible that the charges will not be able to be met from current income. To address this, the Government is consulting on options to enable individuals to meet the charge out of their pension benefits. A joint consultation was published by HM Revenue & Customs and HM Treasury on 30 November 2010.
The consultation sets out two broad options for meeting AA charges from pension benefits, which would permit either:
- meeting a specific year’s liability in real time, while pension benefits are still accruing; or
- rolling up the liability, deferring payment of AA charges until the point that the individual’s pension benefits crystallise.
In both scenarios, the individual would be required to account for the charge on their Self-Assessment tax return.
Other aspects of this approach being considered as part of the consultation include:
- the threshold above which an individual is permitted to meet the AA from their pension benefits – the consultation suggests a level in the region of £2,000-£6,000;
- whether individuals in defined contribution schemes would have need of and/or make use of a facility to meet AA charges from pension benefits; and
- the treatment of individuals who are members of more than one pension scheme – the consultation proposes that individuals be permitted to elect a single scheme to pay the charge.
The consultation closes on 7 January 2011.