Pension Contributions – Good News for Those with Incomes of £129,999.99p!

Pension Contributions – Good News for Those with Incomes of £129,999.99p!
The Pre-Budget Report added another couple of turns of the screw for “high earners” but there was a small concession for those whose income is less than £130,000 per year. This concession was so obscure that you may have missed it. James Bailey therefore spreads the good news!


Pension Contributions

The Budget in April 2009 included the news that tax relief for pension contributions would effectively be restricted to the basic rate of tax with effect from April 2011, and also introduced “anti-forestalling measures” to apply until then to prevent high earners making massive contributions in the preceding two years to get the last of the higher rate tax relief.


Before April 2009, those who made their own pension contributions got tax relief at their marginal rate of income tax, so that if they paid tax at 40%, contributing £100 to their pension scheme only cost them £60 because the other £40 was returned to them in tax relief.

 Contributions to their pension scheme by their employers were not taxable as benefits in kind.


The Effects of the 2009 Finance Act

The 2009 Finance Act changed all that for those whose income (from all sources, not just employment income) was more than £150,000. If they made contributions of more than £20,000 per year (or in certain cases, up to £30,000)to their pension scheme, the tax relief on those contributions was restricted to 20%, with a tax charge to claw back the other 20% relief they would previously have been able to claim.


That over-simplifies the position and the legislation is unbelievably complicated, but it gives the general flavour.


When calculating the level of a person’s income, contributions by their employer to their pension scheme were not included, unless they arose under an agreement to reduce their salary in exchange for more pension contributions by their employer (a “salary sacrifice” scheme), and the salary sacrifice was set up after April 2009. Contributions by the employee, however, have to be added back to find the level of their income.


Future Contributions

From April 2011, however, all employers’ contributions, not just those associated with a salary sacrifice after April 2009, will be included in the calculation of the employee’s income.


In the Pre-Budget Report, a new threshold was introduced, of £130,000 income for the year. Employees caught by this new threshold are now included within the “anti-forestalling” rules, and in the future will be caught by the 2011 rules if their income, including any employer’s contributions, is greater than £150,000.


If your total income from all sources is more than £130,000, you will now be liable to the anti-forestalling measures described above for 2009/10 and for 2010/11, with a tax charge on contributions over the £20,000 limit (which can in some cases too complicated to describe here be raised to £30,000).


After April 2011, when employer’s contributions are taken into account, those with incomes of more than £130,000 will have to add in their employer’s contributions to see if they then breach the £150,000 threshold and are liable for the restrictions on relief.


Practical Tip

 if your income for 2011/12 is less than £130,000 (before adding in contributions by your employer - except for those made under a salary sacrifice after April 2009, which do have to be included), then you will not be caught by the restriction on relief for pension contributions!


So far there has been little dancing in the streets about this, but I suppose that’s just because people are cynical and don’t know when they’re better off.


James Bailey