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Contributing factors

I hear that I might lose the tax relief on my pension contributions soon. Should I be putting more money away now while I can?

In the 2009 Budget, the Chancellor set out a new higher rate of income tax of 50 per cent from April 2010, for those with taxable income of more than £150,000 per year. He also said that from April 2011 tax relief on pension contributions will be reduced for those whose relevant income is £150,000 or more.

Unfortunately, he has also introduced a special annual allowance charge to ensure any significant contributions made before 2011 will not avoid the incoming charges.

Start by looking at your income. The new rules will only apply if your relevant income is more than £150,000. Unfortunately, as is the trend these days, rather than using the existing definition of income, a new one has been created which covers virtually all types, including earnings from dividends and rent.

There are steps you could consider taking to ensure your income falls below the new limit. However, if it is £150,000 or above, considerable care must be taken. From 2011 you will lose the higher-rate tax relief that used to be available on pension contributions.

Furthermore, a new charge will be applied to you, similar to that of a benefit-in-kind, for any contributions made by your employer. This means that if you are caught by the new rules and your employer makes a pension contribution, you will be liable to a 20 per cent tax charge on that contribution, presumably increasing to 30 per cent.

It must not be forgotten that the limits on the annual allowance for pension contributions have not been changed, only the taxation of those contributions.

Within the next two years, the special annual allowance tax charge will be created and any employer contributions of up to £20,000 a year will be allowable as they are today.

If there is no history of regular contributions in the past, then any contribution above the £20,000 will be hit with the 20 per cent personal tax charge on the member.

However, things become complicated because we have protected pension input. This means that if there is an established regular- contribution method in place – quarterly or more frequently – that contribution is classed as protected and can continue to be paid.

It would appear that such a contribution can include an employment contract where contributions are paid as a percentage of earnings, whereby as earnings increase in the normal way, the monetary amount increases.

This would still remain protected if the percentage was not changed. Any contribution above this protected pension input would be liable to the 20 per cent personal tax charge to the member.

There was great dismay that those individuals who had conducted their business affairs correctly, and invariably made one-off single pension contributions, would be caught by the new legislation as their contributions are not deemed to be regular.

The Treasury has agreed to look further into this point but what is available today is far from satisfactory. These contributions need to be looked at very carefully but, in simple terms, any irregular contribution record can provide a protected pension input up to £30,000 where no further tax charge would apply.

Any contributions over £30,000 will not be protected and will result in the 20 per cent personal tax charge for the member.

Remember, the personal tax charge relates to employer contributions. For employee contributions, you will be unable to apply for higher tax relief.

Richard Jacobs is managing director, Richard Jacobs Pensions

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