The special annual allowance (SAA) restricting pensions tax relief was introduced by the Government from 22 April 2009. Anyone with a relevant income of £150,000 or over is affected by the SAA rules from that date. These rules, set out in Sch 35 to last year's Finance Act, are intended to prevent people making additional pension savings over and above their normal pattern of pension saving before the planned restriction of pension tax relief comes into force in April 2011.

On 9 December 2009 at the Pre Budget Report, the Government announced a further change (see Aries article). From the 9 December 2009 the SAA rules will also apply to those with a relevant income of £130,000 or more. This week HMRC published the promised draft clauses amending Sch 35 FA 2009. The amendments cover less than a page and a half, in essence changing some references in Sch 35 to 22 April 2009 to 9 December 2009 and lowering some instances of £150,000 to £130,000. There is a new paragraph 16A which makes special provision about cases in which the individual's relevant income for the tax year 2009/10 is less than £150,000. The technical note published on 9 December 2009 provides guidance on how the new rules will apply.

Comments on the draft legislation should be made by 12 March 2010.

Aries comment

Every year since A-Day (6 April 2006) the Government has felt impelled to tinker with what by the time it was enacted had already become a much less simple pensions tax regime than originally proposed back in December 2002 (see Aries article; the original 64-page condoc is still available on the web, for those who can stand to revisit what might have been).

For many, however, last year's Budget announcement by the Chancellor that

"from April 2011, I will restrict pension tax relief for those with incomes over £150,000 so it is gradually tapered to the same 20% rate the majority of people receive"

was a step too far. A Treasury Consultation on how the restriction on tax relief will be implemented from 6 April 2011 closes next Wednesday (3 March), and it is already clear from comments we have seen that the Government is in for some of the most scarifying criticism ever vented by the industry.

It is not just that the post-2011 regime will fundamentally destabilise the EET (exempt-exempt-taxed) principles on which UK pension provision has always been based, requiring employer contributions to be taxed for the first time as a benefit-in-kind on the employee. Nor is criticism confined to the damage to occupational pension provision which is thought likely to result from the discouragement to senior management to participate. These refer to matters of policy which have already been decided, it seems (although arguably better and simpler ideas to constrain tax relief have been put forward, such as a big reduction in the Annual Allowance). The current consultation is about how to implement the policy, and here the Government is going to be told just what a can of worms it has created. Many questions in the condoc commence with the words "The Government welcomes views on ...", as it seeks to co-opt the industry in finding ways to put this ill-conceived idea into effect. We think they might blanch when they read those views.

Protected pension input amounts: important new concessions

Meanwhile on the plus side today a new SI appeared, dealing with a few seemingly unfair situations which the Minister (Stephen Timms) promised Parliament in the debate at Report stage that he would look at (see Aries article).

The Special Annual Allowance Charge (Protected Pension Input Amounts) Order 2010 (SI 2010/429) ensures that the rules applying to the SAA charge in FA 2009 provide continuing protection where a person leaves a pension scheme and joins a new scheme on exactly the same terms and provides further protection for those who had set up arrangements on or before 22 April 2009. Although coming into force on 19 March 2010 the Order has effect from 22 April 2009 and is therefore retrospective.

This Order amends Sch 35 to provide protection for certain contributions that an individual or an individual's employer was contractually committed to at 22 April 2009 but which had not actually commenced on that date. It also amends the legislation to provide protection for certain lump sum contributions made on 22 April 2009.

The Order further amends Sch 35 to ensure that contributions made by an individual who changes pension provider due to one of the reasons provided for and carries forward exactly the same pension arrangements, commencing within 3 months of ceasing to be an active member of the old scheme, continue to be protected from the charge.

Aries comment