Waveney McKenna

Budget April 2009

The recent budget made some significant changes to pension tax relief for high earners. Following the imposition of the potential 82% tax charge on pension funds left to family members on death post age 75 this is yet another attack on high income earners.

This should worry everyone, in particular the Government has shown a willingness to effectively change contractual terms under existing pensions legislation, increasing the minimum retirement age at which benefits can be taken from age 50 to 55 is just one of many examples of this. Going forward this trend to change legislation which will affect planning is likely to gather pace and areas which could be amended include further increases to the minimum retirement age and the potential to reduce the tax free lump sum payment from the current 25% of the fund. This reduces the ability to plan ahead and the willingness of individuals to tie funds up in something over which they have little control – trust in the contractual terms is essential.

At the moment those earning less than £150,000 do not need to take any action, you can continue to pay up to 100% of your income capped at the annual allowance of £245,000; the budget will not affect your pension savings.

Those earning over £150,000 either in the tax year in question or one of the previous two tax years, as well as being taxed at 50% (with employer NI of 12.8% and the uncapped 1% employee NI the effective tax rate is nearer 64% than 50%) will no longer receive higher rate tax relief on all their pension contributions from April 2011. The tax relief is gradually reduced for those earning over £150,000 and removed entirely for those earning over £180,000.

Transitional arrangements will allow continuing pension contributions, if they are currently being paid, to receive tax relief. A new special allowance of £20,000 is being introduced to allow contributions to be paid up to this limit and still receive higher rate tax relief. Where existing regular payments are already being paid above this level they will receive tax relief at the higher rate up to April 2011.

Most sources of income are taken into account when calculating the £150,000 limit, this includes employed and self employed income, pension income, rental income, dividends and savings, any salary sacrificed in exchange for another benefit and even employee pension contributions.

It does not seem to include employer pension contributions and gift aid donations.

Main Points

If your income is over £150,000 you could be affected if you change the pattern of payments or total pension contributions exceed £20,000 per annum. Higher payments caused by contributions being linked to salary are not caught as these are included within the expected regular contributions.

If limits are exceeded then a tax charge of 20% will be imposed thereby limiting high earners to basic rate relief (and why pay into a pension if you will then be taxed at 40% in retirement and only receive 20% relief on contributions?). Where current regular contributions exceed £20,000 per annum then the tax charge will apply on any increases above the current level.

The budget did provide some reasonable news with the ISA allowance being increased to £10,200 of which £5,100 can be placed in cash. For those currently over 50 they can take advantage of this now and those under 50 will be able to contribute the higher amount from the next tax year.