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The forestall saga

It’s possible that some will be caught out by the relevant income rules on higher-rate tax relief clawback

New rules announced as part of the December 9, 2009 pre-Budget package have extended the clawback of higher-rate tax relief to those with “relevant income” of £130,000 or more. The new pre-Budget anti-forestalling rules work in exactly the same way as those which came into force after the last full Budget on April 22, 2009. Therefore, the first step in determining whether someone is caught is to determine their relevant income. Broadly speaking, relevant income is their full taxable income less certain deductions.

Until 2011, £20,000 of personal pension contributions (as well as loss reliefs and gift aid donations) remain deductible in testing against both the April 2009 £150,000 relevant income limit and the post- December 9, 2009 £130,000 limit. The latest changes have the effect of cutting the antiforestalling taxable income limit from £170,000 to £150,000.

The immediate impact of this change is that around another 150,000 people are brought within the rules applying to highincome individuals.

The anti-forestalling rules mitigate the effects on high earners in several ways:

  • The first £20,000 of contributions to a money-purchase scheme in 2009/10 and 2010/11 are still eligible for full tax relief. Those with a history of regular (monthly or quarterly) contributions above £20,000 can continue to receive full tax relief until April 5, 2011.
  • Those with a history of irregular contributions (single and annual contributions) that average above £20,000 in the last three tax years can pay the lesser of their average and £30,000 and still qualify for full tax relief.
  • Those in defined-benefit schemes can continue to accrue unlimited benefits as long as there is no material change to the scheme benefits or, if there are, the change applies to at least 50 people.
  • Those joining an existing or new group money-purchase scheme (regardless of whether this is an occupational scheme or a group personal pension), can pay in more than £20,000 if their contributions are calculated ‘on the same basis’ as at least 19 other members.

To recognise the fact that there will be a new top rate of tax of 50 per cent next year, the special annual allowance (SAA) charge – which is applied to contributions paid in excess of the antiforestalling limits – will rise to 30 per cent, where contributions receive relief at 50 per cent. However, HMRC has recognised that some excess contributions may straddle the 40 per cent and 50 per cent tax bands and, therefore, the SAA charge will only be 20 per cent where it relates to the part of any excess contribution that receives relief at 40 per cent.

Alongside the changes to the anti-forestalling rules, a consultation document was published with the pre-Budget papers, outlining the new high-earners’ pension tax regime from 2011. Three points are worthy of note:

1: The definition of relevant income will be different from the anti-forestalling rules. In particular, it will no longer be possible to deduct £20,000 of personal contributions from total income before testing against the £130,000 limit. The effective cut in the relevant income limit is, therefore, a stealthy £40,000 (relative to the April 2009 budget changes), rather than the £20,000 presented.

2: Relevant income would appear to apply to taxable income in that particular tax-year rather than any one of the last three, which is the basis used by the antiforestalling rules. Some people may, therefore, find themselves caught one year but not the next.

3: Employer contributions will be counted as part of the customer’s gross income, but only if income excluding the employer contribution (but including the personal contribution) exceeds £130,000.

The taper on tax relief withdrawal (50 per cent reducing to 20 per cent) that was proposed in April 2009, remains for those with incomes between £150,000 and £180,000.

So, it will be possible to be caught by the 2011 rules because your relevant income is above £130,000 but to not be subject to a SAA charge because your total income, including employer contributions, do not exceed £150,000.

The April 2011 changes are still at consultation stage. However, draft legislation was published alongside the consultation, so any changes are therefore likely to be minor. Those wanting to respond must do so by March 3, 2010.

John Lawson Head of pension policy Standard Life

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