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Pension Tax Relief

William — Mon, 06 Dec 2010 12:38:36 +0000

Pension Tax Relief Changes Post 2011

Regulation & legislation focus

The Treasury and HMRC recently announced their future plans for the restriction of pension tax relief. In this article I provide a summary of the Government’s draft regulations.

Annual Allowance and Tax Relief

The annual allowance determines what level of pension contribution can be paid by an individual for tax relief purposes. The changes specific to the annual allowance are as follows:

> Annual allowance will be reduced to £50,000 (from £255,000) for the tax year 2011-12. The Government plans to review the rules and consider options for indexation and apply to both Defined Benefit(DB) and Defined Contributions (DC) pensions. Tax relief will continue to be available at the individual’s highest marginal rate of tax.

> The annual allowance tax charge to recover any undeserved tax will be tailored according to the amount of tax relief the individual has received.

> A flat factor will continue to be used to value Defined Benefit pension accrual, although this will being increased to £16 for every £1 of additional pension (an increase from 10:1).

> Unused annual allowance for up to 3 years may be carried forward where pension contributions/savings for the current year exceed the annual allowance. This will include being able to carry forward from the tax years 2008/09,2009/10 and 2010/11 using an assumed annual allowance of £50,000 for each of those years.

> The new ‘carry forward’ facility will be available to members of both DB and DC schemes.

> The Government will consult on possible options, for those who see a very significant increase in pension savings in a year, for the annual allowance tax charge to be paid out of their pension entitlement rather than their current income. This could include the scheme paying the tax charge on the individual’s behalf(commonly known as ‘scheme pays’) or the liability being rolled forward and paid out of pension benefits once they are taken at retirement.

> Increases in deferred benefits under DB schemes will not be tested against the annual allowance.

> For active members of DB schemes, the previous year’s benefits will be re-valued with the aim of ensuring that only pension benefits arising from salary increases and additional years’ service are tested against the annual allowance (the rate of revaluation has not been confirmed).

> No annual allowance test will take place in the year of a member’s death or where serious ill-health benefits are paid.

> In addition, exemption may be given in certain circumstances where ordinary ill-health benefits are taken(details on how this additional exemption will operate will be published later in 2010).

> Measures will also be taken to include unreasonable increases in pensions in payment to the annual allowance assessment (further details are awaited). However, there will be no other exemptions from the annual allowance test – this means the current exemption for the tax year in which benefits are taken will no longer apply and there will be no exemption for redundancy situations.

Pension Input Periods

The pension input period determines the timescales for an individual’s annual allowance. The changes specific to the pension input period are as follows:

> The existing rules regarding setting:- Pension Input Periods will not change – i.e. pension schemes will generally continue to determine the period and it does not need to be aligned with the tax year. For money purchase arrangements, members will still continue to be able to determine their pension input periods.

> Transitional rules will be put in place for those schemes where the period started prior to 14 October 2010 and will end in the 2011/12 tax year, to reflect the reduced annual allowance for the period from 14 October 2010.

> Those whose pension input period starts on or after 14 October 2010 will be subject to the reduced annual allowance of £50,000 for the whole of the input period.

Lifetime Allowance (LTA)

The lifetime allowance is the maximum pension accrual that can be accumulated without additional tax charges ordinarily applying. The changes specific to the lifetime allowance are:

> It will be reduced from £1.8m to £1.5m, intended to be effective from April 2012.

> The valuation factor for DB accrual will remain at 20:1 (25:1 for pre A-Day benefits in payment).

> The LTA tax charges will remain unchanged – i.e. 55% where the excess is taken as a lump sum and 25% where it is taken as an income (with the income subject to tax at the individual’s own rate of tax).

> Maximum tax-free cash (pension commencement lump sum) will remain at 25% of the member’s available standard lifetime allowance.

> The link between the LTA and trivial commutation will be removed from April 2012 – instead of the limit being 1% of the LTA, it will instead remain at £18,000.

> Protection will be given to those who have ‘already made pension savings decisions based on the current level of the LTA’.

> Government will consult on the detail of the protection regime, but proposes that:

>Those with pension benefits in excess of £1.5m receive protection (subject to a cap on protection of £1.8m).

Anti-Avoidance

The Government are keen that alternative pension arrangements are not used by higher earners to avoid paying tax where appropriate. In this regard legislation will be published,later in 2010, to ensure that Employer Benefits Trusts (EBTs) and Employer Financed Retirement Benefit Schemes (EFRBS) are ‘less attractive than other forms of remuneration.

In summary

In general these rules are more straightforward than the previous method of restricting tax relief, and the annual allowance is more generous than w perhaps thought it woud be. The reintroduction of ‘carry forward’ to pension legislation will please many but will help both DC and DB members to avoid tax charges when there is a spike in contributions/accrual.

>Individuals who currently have Enhanced Protection or Primary Protection (or both) should continue to benefit from that protection.

>It is not currently clear as to how protected tax-free cash will operate post 2011.

>Those with primary protection, and thus who have higher personal lifetime allowance will not lose out as a result of the reduction in the standard lifetime allowance.

>Some form of protection (referred to as ‘pension growth protection’) might be afforded to those who have planned on the basis of their pension fund growing to £1.8m (the current LTA) between now and retirement.

>‘Pension growth protection’ could take the form of a personalised LTA set at £1.8m, in exchange for no further pension savings being made.

If you’re concerned about how these changes might affect you please just get in touch by e-mail or phone and we will try and make sense of it all.

For further information consult the following:- HM Treasury press release – www.hm-treasury.gov.uk/press_52_10.htm

2009 Tax Budget Essentials PDF

William — Thu, 30 Apr 2009 10:12:06 +0000

Hi everyone,

just thought I’d let you know I’ve uploaded a 12 Page 2009 Budget PDF for you to download. It gives you a great information on the following in a really easy to read/understand format.

Some highlights include…

ISA limits
Capital Allowances
Business trading losses
Tax relief on pension contributions
Top rate of income tax details
Personal income tax allowance details

It also covers…

PERSONAL AND TRUST TAXATION
CAPITAL TAXES
BUSINESS TAX
VALUE ADDED TAX (VAT)
MISCELLANEOUS ISSUES – including Tax Avoidance
NATIONAL INSURANCE CONTRIBUTIONS (NICs)
FINANCIAL CALENDAR – to keep you in sync with important fiscal dates

There’s a whole lot more in there but it’s all easy to access and understand, so download it to your desktop if want it. Just click the download link below…

Budget Summary 2009

I hope it helps clarify your Tax issues in 2009.

Bye for now…

End of Tax Year Checklist

William — Wed, 01 Apr 2009 15:13:51 +0000

According to unbiased.co.uk British taxpayers will waste over £10bn in unnecessary tax in 2009. With the end of the tax year nigh, time is rapidly running out if you want to curb your tax bill and maximise allowances.

So what should you be doing if you want to take advantage of tax regulations and save a few bob?

ISAs

Now ten years old ISAs allow people to keep cash as well as assets such as property, stocks and shares in a tax-free wrapper. Up to £7200 can be invested every year, with up to £3600 of the full amount in cash. Although interest rates are at an all time low, good offers are still available in the competitive savings market. If you are thinking of maximising your ISA allowance then you better move very quickly as applications will probably need to be in by Friday at the latest.

Pension Contributions

Each year, UK residents under age 75 can pay in pension contributions equal 100 per cent of earnings, subject to a maximum of £235,000, or £3,600 for non-earners. If you don’t use it you lose it.

If you are within a year of retiring then you can pay in as much as you want, however if you exceed your lifetime allowance of 1.65 million then you will be subject to a healthy tax on the excess.

One very important change taking place in the pension world is that the cost of buying back missed National Insurance contributions will rise on April 6th 2009 so people with missing years might want to buy them now.

Women who have less than ten qualifying years of N.I. contributions do not qualify for a basic state pension but as soon as they reach ten years they are entitled to 26% of the full basic state pension.

The cost of buying back this one year (assuming you already have nine qualifying years) has been calculated at £421.20.

If you were to buy a pension of £23.58 a week on the open market it would cost you £35,240 (for 60 year old woman, single life). This represents a staggering return on investment of up to 8,300%. The price of buying back is set to jump by some 50% in the new tax year.

Inheritance Tax (IHT)

Each person is allowed to give away £3000 a year and this will not count towards your total estate. You can carry this over but for one year only. In addition, gifts of up to £250 a person (small gifts exemption) are also exempt from IHT but you cannot use the two together. If a gift is regular, comes out of your income and does not affect your standard of living, then any amount can be given away and ignored for IHT purposes.

Income Tax

You are allowed to make a gift to your spouse. You can make use of his or her personal allowance, of £6,035, and a basic/lower rate band, £34,800, for 2008/09.

Venture Capital Trusts (VCTs)

With these investment vehicles, income tax is available at a rate of 30% up to an annual limit of £200,000 for subscriptions for shares in a VCT as long as you hold them for 5 years. This is a quoted company holding at least 70% of it’s investments in shares or securities in qualifying unquoted companies trading wholly or mainly in the UK.

These are just a few suggestions as we come up to April 5th. As ever you should seek expert advice before making any decisions. Call me on 0800 321 3508. Good luck paying less tax… legitimately of course!