High earners may contribute at least £30,000 to a pension this tax year and still benefit from 40 per cent income tax relief, following backtracking by the government. Uproar from the self-employed and representations from professional bodies have led the government to make amendments to the anti-forestalling provisions - designed to prevent people with high incomes making artificially large pension contributions before the restriction on higher rate tax relief comes into effect on 6 April 2011 - in the Finance Bill, which is now law.
Higher rate tax relief for pension contributions is to be tapered away or withdrawn for taxpayers earning over £150,000 with effect from April 2011. The government's anti-forestalling rules will prevent such taxpayers from accelerating their contributions to gain extra relief in the intervening period.
Where regular pension contributions continue as previously made, the anti-forestalling provisions do not take effect. But the self-employed are the group most affected by these rules, as they typically make annual contributions once their income for the year has been determined.
Other people who may be caught by the anti-forestalling rules include an individual well below the £150,000 threshold who is made redundant and whose redundancy package takes him over the limit for one year - good advice may have been to have this 'windfall' paid in as a pension contribution on their behalf.
John Lawson, head of pensions policy at Standard Life, says: "By raising the limit to £30,000 for annual contributions, the government has made only a meagre concession to the self-employed and small business owners most affected by these proposals. Those in company schemes who pay pension contributions monthly are treated more favourably because they can protect their full historic contribution level without limit."
Accountants Baker Tilly say that the most important features of the anti-forestalling provisions as they now stand are:
• The maximum contribution that can be made outside the anti-forestalling provisions is increased to £30,000 instead of £20,000; and
• The much criticised definition of 'regular contributions' has been mitigated by a form of averaging for 'infrequent contributions'.
However, while it is a step in the right direction, Baker Tilly points out that the averaging method is still grossly unfair, as this example, based on HMRC's own guidance, shows:
In 2008-09, Angus contributes quarterly to his pension scheme, but in different amounts each quarter. The contributions were as follows:
* April £2,000
* July £5,000
* October £4,000
* January £45,000
HMRC would regard his average contribution as being the median value of the contributions, ie half way between the values of the middle two amounts of his quarterly contributions.
In this example, this would be the average of £4,000 and £5,000 - that is £4,500. Therefore, the protected amount would be £4,500 per quarter, allowing regular contributions totalling £18,000 in 2009-10 and 2010-11. These still fall far short of Angus' total contributions of £66,000 in 2008-09.
The anti-forestalling rules will apply to individuals who are treated as having 'relevant income' of £150,000 or more. According to accountants Grant Thornton, the relevant income for the two previous tax years is also taken into account. For example, if your relevant income was less than £150,000 in 2009-10, you could still be subject to the restricted relief for that year if your relevant income was £150,000 or more in 2007-08 and/or 2008-09.
Any income sacrificed for pension contributions, as part of a salary sacrifice arrangement entered into after 22 April 2009 will also have to be added back in order to arrive at relevant income when looking at the £150,000 threshold.
Clive Fathers, head of employer solutions at Grant Thornton, says: "While this extension of the relievable limit for those with infrequent contributions is welcomed, many will argue it does not go far enough. Those making regular annual contributions in excess of £30,000 will still find themselves disadvantaged compared with those making the same total contributions on a quarterly or monthly basis."
