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Budget 2009: Pension Contributions

The budget has proposed restrictions for higher rate tax relief for high earners. HMRC are seeking Royal Ascent for their proposals in the Finance Act 2009. Royal Ascent usually occurs around October.

What are the changes?

From 6/4/2011 higher rate tax relief is to be removed for high earners.

• From 22/4/09 higher rate tax relief is to be restricted for new contributions up to 20k (special annual allowance) until 6/4/2011.
• If contributions are made in excess of the special annual allowance (and higher rate relief claimed) a special annual allowance tax charge of 20% of that contribution will be charged.
• The only exemption to the above is if regular contributions have been made- going back to tax year 2007-2008.
• Frequency for regular contributions is quarterly or monthly. Annual contributions do not count

Who will it affect?

Individuals with earnings of £150,000 or more
Definition of earnings is everything i.e. earned and unearned income, from tax year 2007/08

How does it work?

Personal contributions case study

Joe has pensionable earning of 200K. He wishes to make relievable contributions of 200k. He has not made any previous regular contributions.

As his contribution is within the annual allowance he will obtain:

1. Basic rate tax relief on his contribution, and;
2. Higher rate tax relief, for £20k of his contribution (without paying a special annual allowance tax charge)

If he claimed higher rate tax relief on any contribution above £20k he would be liable to pay an annual allowance tax charge of 20% of the excess.

Company contributions case study

As per above, but company makes contribution for Joe.

Any contribution in excess of £20K will be subject to the annual allowance tax charge i.e. £36k (20% of £180k) as a “benefit in kind” for Joe.

Apr 30, 2009