May 2009

POTENTIAL LOSS OF HIGHER RATE TAX RELIEF

The Chancellor of the Exchequer announced changes to the tax system in his 2009 Budget, which will have a significant impact on high earning individuals contributing or planning to contribute, to pension schemes.

  From 6 April 2011 the Government will restrict tax relief for individuals with an annual income of £150,000 or more. Relief will be tapered away so that for those with income of £180,000 relief will be worth 20%, the same that is available to a basic rate taxpayer.

  The Government has also introduced new rules, which apply from 22 April 2009, to restrict higher rate tax relief on pension contributions for certain individuals for the period up to 5 April 2011. These restrictions will apply to an individual known as a high income individual:

• Whose relevant income is £150,000 or higher in either the 2009/10 tax year or in either of the previous two tax years;
• Who changes their normal ongoing level of regular pension savings, and;
• Whose total pension contributions exceed £20,000 per annum, which includes both personal and employer contributions.

This will remove the advantage to those individuals of increasing their pension contributions in excess of their current normal contribution pattern prior to the new rules coming into effect in April 2011.

It is therefore important that prior to the payment of any contributions to a registered pension scheme, by either an individual or an employer, it is determined whether the individual concerned is affected by the Budget announcement.

Should a contribution be paid by, or in respect of an individual, who is a high income individual prior to 5 April 2011, which is in excess of £20,000 per annum (or their established level of regular pension savings if higher) they will be subject to a personal tax charge, which has been set at 20% for the 2009/10 tax year on the excess. This tax is collected via personal self-assessment.