Here we explain the changes to tax relief following the 2009 Budget and the pre-2010 Budget report, to help you understand how these changes might affect you. You should discuss these changes and their implications with your financial adviser or tax specialist.
Any reference to legislation and taxation is based on Standard Life's understanding of law, HM Revenue & Customs practice and pension tax changes made in the Finance Act 2009 and announced in the pre-2010 Budget report. Tax and legislation are liable to change in the future. Further changes may be made to tax relief and the value to you depends on your financial circumstances.
The Government has announced that, from 6 April 2011, additional tax relief (namely tax relief over and above basic-rate tax relief):
Gross income will include all pension payments, including the value of any benefit funded by, or eventually funded by, your employer. However, if an individual's gross income, minus the value of any employer pension payments, is less than £130,000, the restriction on pension tax relief won't apply to them.
The full additional tax relief will still be available until 5 April 2011. The new tapered relief will start on 6 April 2011, but there's a tax penalty for boosting pension payments before that date. See below for more details.
The Government will be consulting on these proposals until 3 March 2010, so further changes may be made.
The new tax rate of 50% on taxable income above £150,000 will apply from 6 April 2010.
With effect from 22 April 2009 (the day of the 2009 Budget), the Government introduced new rules for high-income individuals. The Government then announced further rules with effect from 9 December 2009 (the day of the pre-2010 Budget report).
The purpose of these rules is to stop a high-income individual boosting their pension payments now to take advantage of the additional tax relief that's going to be removed or reduced for them with effect from 6 April 2011.
Under these new rules, if a high-income individual:
then a special annual allowance tax charge will cancel out the additional tax relief on the increased pension payments. This tax charge is 20% for the 2009/10 tax year and between 20% and 30% for the 2010/11 tax year. It will be administered by HM Revenue & Customs through the self-assessment tax returns completed by high-income individuals.
If the regular pension payments made before the relevant date are below £20,000 a year and are increased, the special annual allowance tax charge will apply to the payments above £20,000 a year. However, if the regular pension payments already exceed £20,000 a year, the special annual allowance tax charge will only apply to any additional payments in excess of the current level at the relevant date.
Pre-determined increases where total pension payments are above £20,000, are exempt from the special annual allowance tax charge. For example, if pension payments are linked to salary, or go up in line with national average earnings, these will continue to receive additional tax relief.
It means someone whose relevant income in the current tax year (or in any of the two previous tax years) is (or has been) equal to or greater than the relevant limit.
It means your total income for the tax year, before any personal allowances or other reliefs, less any normal deductions for reliefs such as those for individual pension payments (up to £20,000 a year), trading losses and gift aid. It also includes salary sacrificed in exchange for your employer providing pension payments or additional pension benefits, but only for salary sacrifice arrangements made on or after:
If your relevant income for the tax year is:
There are special provisions if you're a high-income individual and you, your employer, or a third party have made irregular payments to your pension plan(s). An irregular payment is one that's made less often than once a quarter.
If the average of the irregular payments made to your pension plan(s) in the tax years 2006/07, 2007/08 and 2008/09 is:
You should re-read the 'Tax penalty for boosting pension payments before 6 April 2011' section using the figure that applies to you.
You should speak to your financial adviser or tax specialist.
You can also read the guidance issued by HM Revenue & Customs:
The links provided are for general information purposes only. Standard Life accepts no responsibility for information contained in the site or for the site not being available at all times.
