Budget 2009 announced that, in order to ensure that the system of pensions tax relief remains fair, affordable and sustainable, tax relief on pension contributions would be restricted for those with incomes of £150,000 and over. This restriction applies to all contributions, including those from employers.
The gap between the announcement and implementation creates a real risk that those affected, or who believe they might be affected, would attempt to forestall the new rules by making large contributions now to take advantage of higher rate tax relief that would not be available to them after April 2011.
To prevent this, at Budget 2009 the Government introduced an anti-forestalling regime. It seeks to enable high-income individuals to continue to receive higher rate relief on pension contributions that they would have made in the absence of the announcement of the 2011 reform, but not on higher contributions prompted by that announcement.
As announced in the 2009 pre-Budget report, the restriction of relief from April 2011 will apply to individuals whose income, including the value of any pension benefit funded by (or eventually funded by) an individual’s employer, is £150,000 or over. This will be subject to an income floor so that those with pre-tax incomes, excluding the value of any employer contributions, of less than £130,000 are unaffected. So, the restriction will apply to about 2 per cent. of pension savers, who currently receive around a quarter of tax relief on pension contributions.
To prevent an estimated £400 million of tax revenues being put at risk before April 2011 by additional forestalling, the Government have today announced that the anti-forestalling rules will be extended to apply to individuals on incomes of £130,000 and over (with income being as defined on the same basis as in the existing anti-forestalling rules), effective from 9 December 2009 and for the remainder of this tax year and next. This will be legislated in Finance Bill 2010 and draft clauses will be published shortly.
Those newly brought into the regime will be subject to the special annual allowance, which remains unchanged. This means that they will continue to receive higher rate relief up to the level of their normal (defined as quarterly or more regular) pension contributions; or the lower of £30,000 and average contributions over the past three years if contributions are less regular than quarterly; or £20,000; whichever is highest. Contributions exceeding these limits made prior to the new rules taking effect will not be charged. Further detail on these provisions is available at: www.hmrc.gov.uk. Around 98 per cent. of pension savers will not see their tax relief restricted by these provisions.
The Government believe that this action is necessary, and that a straightforward extension of the current anti-forestalling provisions is the simplest, least disruptive and least burdensome way to achieve this.