With immediate effect the Government has further amended the anti-forestalling legislation, introduced in April this year to stop higher earners substantially increasing pension contributions ahead of the restrictions on higher rate tax relief coming in from April 2011 (See Aries Budget Report for summary). Under FA 2009 Sch 35, in assessing whether 'relevant income' exceeds that threshold and renders the individual potentially liable to the Special Annual Allowance (SAA) limit on tax-relievable new pension contributions, employer pension contributions don't count (except for post-22 April 2009 salary sacrifice arrangements).
In today's Pre-Budget speech Chancellor Alistair Darling announced that the restriction of pensions tax relief from April 2011 will apply to those with gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including those funded by an employer (except pre-9 December 2009 salary sacrifice arrangements). This will be subject to an income floor, so that individuals with pre-tax incomes (excluding employer pension contributions) of less than £130,000 will be unaffected.
Legislation will be introduced in Finance Bill 2010 to amend the anti- forestalling threshold to income of £130,000 or over, retrospective to today. In effect, then, from 9 December 2009 the SAA rules will also apply to those with income from £130,000 to £150,000. A Technical Note on how the new rules will apply has been published today.
The SAA is a temporary measure for the tax years 2009/10 and 2010/11. Today the Government also launched a substantial consultation document plus draft legislation on how the restriction on tax relief will be implemented from 6 April 2011. Individuals will be affected if:
- pre-tax income, before deduction or relief for pension contributions and charitable donations made by the individual, is £130,000 and over; and
- gross income is £150,000 and over, where gross income is their pre-tax income as above, but including the value of any pension benefit the individual receives from others, typically their employer.
A taper will apply for those with 'gross incomes' from £150,000 to £180,000 gradually reducing tax relief on pension contributions to basic rate. Absent from the condoc at present is the difficult matter of how benefits in defined benefit schemes should be valued for this purpose.
The consultation closes on 3 March 2010.
The Government today also announced changes to the rates for the tax charge on
- short service refund lump sums (20% on the first £20,000 of the refund and 50% on the remainder) and
- Employer-Financed Retirement Benefits Schemes ('EFRBS') payments other than to individuals (50% for benefits received on or after 6 April 2010).
The changes are being made to take account of the new 50% additional rate for income tax coming into force in 2010/11.
Other Pre-Budget Report announcements
Basic State Pension increase
RPI inflation last September was minus 1.4%. This would have meant no increase in in April 2010, but the Chancellor confirmed that the basic state pension will not be frozen, but instead will rise by 2.5% - a real terms increase of nearly 4%.
National Insurance contributions:
This will be paid for partly via a further increase in National Insurance Contributions (NICs). All employer, employee and self-employed NICs will increase by 0.5 % from April 2011, on top of the 0.5% previously announced in the 2008 Pre-Budget Report. However, to protect those on modest incomes, the starting point from which NICs are payable is to be raised, so that no-one earning under £20,000 will pay the higher contributions.
State Pension Credit
The capital disregard for pension credit is to be increased from £6,000 to £10,000, benefiting an estimated 540,000 pensioner households by an average of £4 a week. Pension credit beneficiaries are also to be contacted to encourage them to claim back tax they may have overpaid on their savings income.
Inheritance Tax (IHT)
The individual IHT allowance is to be frozen at £325,000 for the next year (it was due to rise to £350,000 in 2010/11). This will still mean that fewer than 3 % of estates will pay this tax.
Higher rate tax threshold
In April 2012 the point at which people start paying income tax at 40 % is to be frozen for one year.
Public sector pensions
By 2012 contributions by the state to public service pensions for teachers, local government, NHS and the civil service will be capped - saving around £1bn a year. Public sector workers will make a greater contribution to the increasing value of pensions, with those earning over £100,000 paying more.
Personal Accounts
Finally, the Chancellor mad a brief passing reference to "phasing-in the roll-out of pension personal accounts", in the context of an overall saving of £5bn from spending programmes. In the absence of any further details in the PBR, it is unclear whether this represents a new delay.
