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Pension Contributions - a Small Concession For Big Earners

Pension Contributions - a Small Concession For Big Earners
On 22 April this year, Alistair Darling presented one of the most political Budgets of recent times. There were several measures, introduced under the guise of coping with the disastrous economic situation, but rumoured to have been demanded by the Trade Unions as the price of their continued support for the Labour Party, which were aimed at punishing success by increasing the tax burden on high earners. 

 

Whatever the motivation behind the new rules, tax rates are to be increased to 50% on income over £150,000 from next April, together with a complex “tapering” mechanism that produces a whopping rate of 60% on income between £100,000 and about £115,000.

 

The most savage and irrational of these measures, however, involves pension contributions. From April 2011, tax relief on pension contributions by individuals earning over £150,000 will be restricted to the basic rate of tax – by a “tapering” mechanism which reduces the relief from 50% at income of £150,000 down to 20% at £180,000.

 

In order to prevent the obvious countermeasure of shovelling as much as possible into the pension pot before April 2011, the Budget also announced “anti-forestalling” legislation which caps the tax relief on pension contributions made after 22 April 2009.

 

If an individual’s taxable income is more than £150,000 in any of the three tax years 2006/07, 2007/08, or 2008/09, then he is caught by these “anti-forestalling” rules, which are actually even more draconian than the ones to come in 2011.

 

For these people, any relief at the higher rate of tax on contributions over £20,000 in 2009/10 or 2010/11 will be clawed back by way of an assessment to income tax.

 

There is an exception for those who can demonstrate a pattern of making “regular” contributions of more than £20,000 per year before 22 April 2009. They can continue to make “protected” contributions at the same rate until April 2011 when the new rules come into full effect.

 

The problem is that “regular” is defined as quarterly or more frequently. Most high earners are in the habit of making one or two large contributions in the year, typically when they have a good idea of what their income for the year is likely to be. Such contributions, not being “regular” according to the rules, do not count as “protected” from the new regime.

 

After much lobbying, a small concession was announced by way of an amendment to the Finance Bill in the House of Lords, shortly before it became law as the 2009 Finance Act.

 

Under this amendment, if the average “irregular” pension contributions during the three years 2006/07, 2007/08 and 2008/09 were more than £20,000, then that average amount will count as “protected” too, but this is subject to an overriding maximum of £30,000.

 

At best, therefore, high earners who have made contributions at irregular intervals may be entitled to an extra £10,000 “protected” contributions without encountering the claw back of tax relief.

 

It remains to be seen what the effect of these measures will be – but given previous experience with such high rates of tax, the gain to the treasury will be minimal (the anti-forestalling measures for example, are only predicted by the Chancellor to raise about £2billion, which sounds a lot but is only a drop in the fiscal ocean), but the gains to the tax avoidance industry may well be very substantial!

 

James Bailey