Monday, May 11, 2009

Pension tax changes that hit high earners NOW

In his Budget the Chancellor talked about changes to the pension rules that would come into effect in two years time. He also mentioned, and the Finance Bill now contains, what are referred to as, anti-forestalling provisions. These restrictions were explained in BN 47 and apply to anyone:

• whose income is £150,000 or higher this year;
• who changes their normal, regular ongoing pension contributions; and
• whose total pension contributions are more than £20,000.

In practice these rules mean that higher rate tax relief is no longer available for many people earning more than £150,000 this year. In effect the new rules come into effect two years earlier than was announced.

It's the disingenuous nature of the announcements that get me. And if not disingenuous then ignorant. It's one or the other. And then there's the way that Ministers and top civil servants are unaffected. Coincidence? I fear not.

The provisions are likely to affect far more taxpayers than those at which we are told they are targeted. For example anyone making ad-hoc pension contributions of more than £20,000 who:
• was made redundant and whose termination payments push them over the £150,000 income threshold for one year only; or who
• was approaching retirement and had deferred making effective pension contributions until they were older and more financially stable.

In both of these cases the reason for the increased pension contributions is nothing to do with trying to obtain relief at a higher rate than might be available in the future. Nevertheless if their contributions exceed £20,000 this year, they will not qualify for higher rate tax relief.

And then there are the self-employed who do not make regular pension contributions every month. They will also be disadvantaged if they continue to make their annual pension contribution only once they know what they can afford to pay. This is typically only the case after they produce their annual accounts. If they want to pay more than £20,000 in one go their tax relief will be restricted. This seems most unfair – but at least on this point the Government has agreed to listen to representations.

Ministers and civil servants are unaffected
It’s also worth noting that the new provisions favour those in final salary pension schemes, predominantly government and similar organisations. Few other employers can afford to provide final salary related pensions.

Under the new rules ministers and civil servants, for example, are only affected if their benefits increase as a result of changes in accrual rates or pension scheme rules. Increases in salary alone will not bring these individuals within the anti-forestalling provisions.

Compare this with anyone in an employer’s money purchase pension scheme. They could lose tax relief immediately on additional contributions which arise only by reason of a pay increase.

What do you think? Disingenuous? Unfair? Reasonable? Fair? Please add your comments to this post below.

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