Pensions tax: restricting higher rate relief
The measure
The Government has indicated an intention to scrap the 'high income excess relief' charge before it comes into effect on 6 April 2011. In its place it is considering capping the annual allowance at between £30,000 and £45,000, subject to discussion with interested parties. The anti-forestalling measures for 2009/10 and 2010/11 will not be disturbed.
The annual allowance was first introduced as part of the simplification of pensions tax effective from 6 April 2006. It was initially set at £215,000 and has increased by £10,000 each year since then. For the current tax year the allowance is £255,000. The annual allowance limits the pension savings that can be made by or on behalf of an individual, with tax relief at the individual's highest marginal rate. Pension savings in excess of this amount attract an annual allowance charge, currently of 40%.
The total that may be saved into a pension during a person's lifetime is limited by a lifetime allowance, currently £1.8 million. This overall limit will be reviewed to determine whether it remains appropriate given the prospective lower annual allowance.
Other details to be discussed include:
- whether to change the calculation of the value of the pension accrued each year by members of defined benefit (also known as 'final salary') pension schemes for the purpose of testing against the annual allowance. This is currently calculated by multiplying the annual increase in accrued pension by a factor of 10;
- how to ensure basic rate taxpayers are not caught by the restriction;
- how to exempt those who have a large one-off increase in pension savings in a year, for example as a result of a step change in salary following a promotion; and
- whether and how to allow payment of the charges to be spread.
Who will be affected?
The new measures announced today will take effect from 6 April 2011 subject to the outcome of Government consultations.
When?
The new measures announced today will take effect from 6 April 2011 subject to the outcome of Government consultations.
This is a sensible measure and one that we and others in the pensions industry called for. It will achieve the Government's objective of limiting the amount of higher rate tax relief available to high earners who make pension contributions, without the complexities of the high income excess relief charge.
