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Making allowances

Following the Budget earlier this year, the pension industry has spent a fair bit of time getting to grips with the immediate changes to higher-rate pension tax relief and, following extensive lobbying, with “the changes to the changes”. The question is, where are we now?

Who is affected?

Those affected by the change are still those whose income is £150,000 or more in the applicable tax year or in either of the previous two tax years. It is worth noting that pension payments of up to £20,000 can be deducted from the income calculation, meaning that someone who has income of £150,000 or more may not be affected by the new rules. But it is also important to note that any pension payments made following a salary sacrifice arrangement agreed from April 22, 2009 have to be included as income.

Individuals who earn £150,000 or more have a “special annual allowance” of £20,000 a year. This is the maximum amount of “new” pension payments they can make (or, if they paid less than £20,000 before the Budget, the maximum they can increase payments to) and still attract full higher-rate tax relief. If more than £20,000 is paid, a “special annual allowance charge” of 20 per cent applies, effectively restricting tax relief to the basic rate.

For those who were already making pension payments of more than £20,000 a year at the time of the Budget, there are rules to protect some or all of their existing pension payments. There are different rules for regular and single payments.

Regular payments

Regular payments paid at least quarterly can be protected. This is called a protected pension input amount. The purpose of the PPIA is to protect the existing level of regular payments, so this can be more than £20,000. For example, someone making regular payments of £3,000 a month in the 2008/09 tax year has a PPIA of £36,000 a year (£3,000 x 12).

It is worth noting that HMRC is not concerned about any regular payment that was missed. It has said that it considers this to be an “insignificant failure”. If regular payments are based on a percentage of salary, the protection will apply to any salary increase as well.

Protection can also be given where at least four payments have been made in one tax year. If each payment is of an equal amount, the PPIA will be the total payments value. However, if the payments are of a different value, the PPIA is the median value over the tax year (the median value being the middle value). If there is an even number of payments, the average of the two middle payments is the median value. For example, if payments were £12,000, £8,000, £7,000 and £5,000, the median value is (£8,000 + £7,000)/2 = £15,000/2 = £7,500. The PPIA is £7,500 x 4 = £30,000 a year.

Where the PPIA is less than £20,000, there is scope to pay additional regular or single payments up to the £20,000 limit.

Single payments

Those funding their pension savings by single payments (a typical example being the self-employed) were initially excluded from any protection. Following lobbying, the Government has introduced some protection for this group. They have been granted an increased special annual allowance of up to £30,000 a year. An individual’s special annual allowance is calculated as the average of the total single payments made in the three tax years, that is, 2006/07, 2007/08 and 2008/09, up to the maximum of £30,000.

For example, an individual made single payments of £20,000, £25,000 and £30,000 in the 2006/07, 2007/08 and 2008/09 tax years respectively. Total single payments are therefore £75,000. The average single payment is £25,000. £25,000 a year is the special annual allowance that would apply for this individual.

If payments were made in only two of the tax years, you still calculate the average over the three tax years.

It is not possible to have both a PPIA for regular payments and an increased special annual allowance for single payments. Clients who have paid both regular and single payments are only allowed to pay up to the higher of the two limits.

What we still need to know

We are still awaiting confirmation that regular-payment PPIAs can be trans- ferred to another scheme. The Finance Act 2009 did not allow for this. Confirmation of this change would bring regular payments into line with single payments, where the special annual allowance of up to £30,000 can apply to any scheme, existing or new.

Finally, we are also awaiting clarification on any concessions the Government will make on contributions made around Budget time that are inadvertently penalised by these new rules.

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