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2009 Budget: Pensions & Salary Sacrifice

Simon Parsons on pensions: anti-forestalling

It is important that everyone is encouraged to save for their retirement, but I intend to address the anomaly which sees a tiny proportion of the top taking a large slice of the help...Alistair Darling, Chancellor of the Exchequer

Some 25% of  tax relief on pension contributions are applied to the 1½% UK top earners. Darling continued: “So from April 2011, I will restrict pension relief for those with incomes over £150,000.. I am introducing measures from today to prevent forestalling”.

With personal tax changes announced at this Budget, pension tax relief would become even more generous to the highest earners. Pension tax relief needs to be recast…..the gap between the announcement and the implementation in April 2011 creates a real risk that those affected would attempt to forestall the new rules by making large contributions now.Stephen Timms, Financial Secretary

The “anti-forestalling” legislation enables HM Revenue & Customs to apply a tax charge to all the contributions made or accrued in excess of £20,000 where avoidance schemes are found and to prevent income restructuring. “The government believes this measure strikes the right balance between the interest of taxpayers, savers and pension schemes” stated Mr Timms.

With effect from 22 April 2009, changes are applied to prevent high earners attempting to avoid the future 50% tax rate and also avoid the proposed restriction to basic rate of pension contributions from April 2011.

The good news is that none of the changes on earnings levels, tapering and pension contribution restrictions are anticipated to directly impact Payroll and its operation. The potentially bad news for HR and Payroll is that these high earners will have an expectation of being advised on what to do and not wanting to be presented with late, large tax bills and if so doing, apportioning blame on the incorrect operation of their pay or PAYE through payroll.

Who is impacted?

Individuals with incomes of £150,000 or more who, on or after 22 April 2009, change:

• Their normal pattern of regular pension contributions: or
• The normal way in which their pension benefits are accrued, and
• Their total pension contributions/benefits accrued exceed £20,000 a year.

These cases will fall under “anti-forestalling” provisions which are to be included in the Finance Bill 2009.

The new measure does not apply to:

• Anyone with an income of less than £150,000
• For those with an income exceeding £150,000 who continue as normal with their existing patterns of regular pension savings no mater how high (known as protected pension input) and who do not make any additional pension savings.
• For those with an income exceeding £150,000 who do make additional pension savings but where the total pension savings are at or below £20,000.

The new special annual allowance and associated tax charge apply to total contributions made by the individual, their employer or by a third party and to any benefits accruing in defined benefit schemes. When exceeded, the individual will pay a special annual allowance charge on the excess at the difference between the top rate of tax and basic rate (20%) collected through the self assessment tax return.

Amendments are also being made to The Disclosure of Tax Avoidance Schemes (DOTAS) to bring in to play obligations to report any arrangement that may attempt to avoid liabilities.

So what is determined as income for the £150,000 test?

• Total income before pension contributions, personal allowances or other relief’s or deductions
• Less any normal deductions for relief’s (such as trading losses)
• Less any gift aid deductions

But what about Salary Sacrifice? In calculating “relevant” income any amount of employment income foregone by salary sacrifice in return for pension contributions or additional pension benefits must be added back if the agreement was put in place on or after 22 April 2009. So any salary sacrifice agreement made on or after 22 April 2009 to increase pension contributions or benefits will be disregarded. Income is pay before the salary sacrifice took place.

Is this the start of a new era of Government treatment of Salary Sacrifice? Will restriction expand in the future to 40% tax relief payers?