Pension Planning for High Earners

The Government has announced that, from 6th April 2011 onwards, it intends to restrict higher rate tax relief on pension contributions for individuals with an annual income of £150,000 or more. In anticipation of this change, there is a special annual allowance and associated tax charge from 2009-2010 that applies in respect of individuals who bring forward their pension contributions or otherwise make new or additional pension saving ahead of 6th April 2011.

The Government will consult on new rules which will come into force on 6/4/2011 with the aim of reducing tax breaks for those with relevant income of £150,000 or more on a tapered basis so that those with income above £180,000 will effectively only get basic rate relief.

The special annual allowance rules were introduced from 22/4/09, but remember the changes will only affect individuals with relevant income in the current or 2 previous tax years of £150,000 or above.

For the period 22/4/09 to 5/4/10, and the 2010/11 tax year, high income individuals will be subject

to a special annual allowance of the highest of:

• a basic allowance of £20,000, or
• an enhanced allowance of up to £30,000 (based on the lower of £30,000 and the average money purchase pension contributions paid by, or on behalf of, the individual less often than quarterly in the three tax years 2006/07, 2007/08 and 2008/09)
• or their protected pension input amount (based on their regular provision before 22/4/09).

All pension provision made for a high income individual personally, or by their employer or a third party, will be tested against their special annual allowance. Any pension provision made in excess of a high income individual’s special annual allowance will be subject to a special annual allowance tax charge set at 20% for the 2009/10 tax year and payable via self-assessment.

Please remember that:

Relevant income includes all income, not just earned income, and you must check the income level for the previous 2 tax years.

Salary sacrifice, unless agreed prior to 22nd April 2009, must be added back in when calculating relevant income.

For further information please contact Duncan Glassey on 0131 247 6745.