Restricted tax relief on pension contributions

Successive chancellors have repeatedly said that they want to encourage people to contribute to their own pension scheme and reduce the burden on the state. Repeated attacks on the pensions industry are doing nothing to help the situation and the latest bombshell won’t be very encouraging either.

From 2011/12 higher rate tax relief is to be withdrawn on contributions made where the taxpayer’s income is over £150,000. The rate of relief is to be reduced by 1% for every £1,000 of income over £150,000 such that the rate of tax relief on contributions is gradually reduced from 50% to 20% up to the point where the taxpayer’s earnings exceed £180,000.

Not only that, just in case anyone seeks to pay large contributions in the run up to April 2011 the Chancellor announced the concept of anti-forestalling and initially stated that higher rate tax relief would be restricted to contributions of £20,000 where an individual’s income has exceeded £150,000 in the current or any of the two previous tax years – unless they had consistently been paying normal regular monthly or quarterly contributions in excess of £20,000.

In the committee stage debates on the Finance Bill the figure has been increased to £30,000 but only for those people who have contributed at least that much on an annual basis over the last three years. As we go to press representations have been made to increase the figure to £50,000, but up now the Government are resisting this.

For high earners therefore, contributions in excess of the proposed limit of £30,000 may suffer a tax charge in 2009/10 or 2010/11. Some people however, may be in the fortunate position of being able to pay large contributions in 2009/10 and 2010/11 without being impacted by the £30,000 limit and to maximise their contributions, before the new rules come in to force in April 2011.

The debate is set to continue and further changes could yet be announced. It is therefore essential to seek professional advice, before making any contributions.

Add into this the fact that taxpayers aged between 49 and 54 are able to draw their tax free cash entitlement from their pension funds prior to 5 April 2010, then it throws up some interesting tax planning opportunities. If the tax free cash is not taken prior to this date then one would have to wait until they were aged 55 to be able to access the funds.

If you would like to discuss any of these issues get in touch with Ian Smethurst on 01204 55 1100 or email ismethurst@clbcoopers.co.uk