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Eye watering rules affect pension contributions by the wealthy

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27th Apr 2009
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As a consequence of the planned restriction of tax relief on pension contributions by those earning more than £150,000 from 2011, the Government has also brought in “anti forestalling” measures from Budget day.

These rules are intended to prevent those affected by the restriction in 2011/12 paying very large sums into their pensions between now and April 2001 to benefit from extra tax relief. Oddly, however, the transitional rules will reduce tax relief to 20% for those affected – even though we have already been told that relief will be tapered at £150,000, only reaching 20% at income of £180,000. It would seem that the transitional rules put some contributors in a worse position than they will be after the change!

Of course rules affecting those with income of £150,000 or more do not have the wide appeal to smaller firms, but practices will need to be aware of the restriction, as it impacts on advice to high earners, and may mean that they will seek other places to save.

HMRC has put out a vast array of information to explain the transitional rules, which are very complex, with a number of definitions to be studied, and then applying these to the practical situation. The rules will not affect anyone who has not had income of at least £150,000 at any time between 2007/08 and 2010/11. The rules affect earlier tax years as if the taxpayers income in either 2009/10 or 2010/11 is less than £150,000 they must also check their income in the two preceding tax years before they can be sure that they are not affected.

Those paying in less than £20,000 to their pension in either 2009/10 or 2010/11 are similarly not affected. After that, things start to get tricky : for example your regular pension contributions are OK, but if you increase your contributions that increase could trigger a tax charge. BUT the “regular” pension contributions are only those for which a commitment exists to pay at least quarterly before 22 April 2009. So anyone who pays an annual contribution determined by his available cash resources at the end of the tax year will not have any “regular” contributions established, and so will be restricted to £20,000 pension input, or face a tax charge. Contributions by employers will also be hit by the tax charge, which takes into account all pension inputs including enhancement of benefits in defined benefit schemes.

More information is available as follows :

Extract from Hansard – statement of Stephen Timms on 22 April 2009

A Technical Guide

Guidance for individuals

Guidance for the pensions industry

Draft legislation and draft guidance note

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By AnonymousUser
07th May 2009 09:18

Public sector
I wonder if the 171 civil servants who earn more than this amount will have their pensions capped?

http://www.thisislondon.co.uk/news/article-23373106-details/Revealed:+Public+sector+%27fat+cats%27+who+earn+more+than+%C2%A3150,000+per+year/article.do

And they enjoy rather more security of job and salary than many of those in the private sector or in professional practices who earn 150k +.

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By User deleted
27th Apr 2009 20:11

Complexity and confusion
I used to understand the rules about pension contributions and tax relief - I'm glad I'm now retired! What happened to "pension simplification"? My best wishes to all those struggling with this latest example of needless complexity. A similar result could be achieved by far simpler, if less politically motivated, means.

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