Pension Tax Relief
The previous Government had laid the initial legislation in the Finance Act 2010 for the introduction of the ‘high income excess relief charge' that would have taken effect from 6 April 2011 and would have restricted the pension tax relief available to high income individuals with ‘relevant income' of £150,000 or more.
There had been much criticism of this new tax charge by the pension industry in view of its administrative complexities and the potential difficulty in explaining this to affected individuals. This measure was, however, seen as extremely important by the then Government as it was estimated to raise around £3.5 billion in additional tax.
The Chancellor, George Osborne, has now announced that Labour's planned ‘High Income Excess Relief Charge' (HIERC), due to come into force on 6 April 2011, will not now go ahead. Instead the Government will work with the pensions industry to devise an alternative, simpler and less damaging way to restrict tax relief. Bearing in mind the continued lobbying from the pensions industry, this is expected to be based on a much reduced annual allowance.
This is on the proviso that the alternative raises at least the same amount of revenue as the HIERC plans would have done. Initial thoughts are that an annual allowance of £30,000 to £45,000 could meet the Government's objectives.
Once a decision has been reached the HIERC legislation already included in Finance Act 2010 will be repealed. Legislation will be introduced before Parliament's summer recess to repeal the existing legislation, and will be implemented through regulations once the Government has decided on the detail of its approach.
In the meantime the existing ‘anti-forestalling' measures will continue to restrict higher rate tax relief for certain individuals from 22 April 2009 through to 5 April 2011. The Government has said it will continue to keep tabs on this interim regime and act if it feels tax revenues arising thereunder are threatened.
Planning
The fact that each person has their own personal allowance and their own starting and basic rate tax bands means that worthwhile overall income tax saving opportunities exist for 2010/11. This is especially so in regard to income that falls between £100,000 - £112,950 - causing the removal of the personal allowance and an effective tax rate of 60%.
Those individuals with ‘relevant earnings' of less than £130,000 in tax year 2010/11(and in the two immediately preceding tax years) should consider maximizing their pension savings in tax year 2010/11. Such savings will not be subject to any special annual allowance tax charge.
Those individuals with ‘relevant earnings' of £130,000 or more in any of tax years 2008/09 to 2010/11 will be subject to a special annual allowance tax charge on any pension savings in 2010/11 that exceed the greater of their special annual allowance and any protected pension input. Full advantage should be taken of their special annual allowance (ie normally £20,000 but potentially up to £30,000) and protected pension input.
Ending compulsory annuitisation
Up until now a member has effectively had to ‘annuitise' their benefits at age 75. The Government has now announced its intention to remove such a requirement with effect from tax year 2011/12.
Pending implementation of the necessary changes, legislation will be introduced in the Finance Bill 2010 to increase to 77 the age by which members have to buy an annuity or otherwise secure a pension income.
This is aimed only at those reaching age 75 on or after 22 June 2010. It allows them to put off making a decision until the new rules are in place.
Pensions Tax Relief - Urgent Action Required
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