Holden Associates – Accountants & Business Advisers Blog

In my first posting on the Holden Associates blog I thought I would cover a topic that could easily be missed by many.

Who would have thought a responsible Government would introduce legislation to discourage the payment of pension contributions? but it’s there in Schedule 35 of the 2009 Finance Bill.

These provisions apply to contributions made from 22 April 2009 where all of the following also apply:

· the taxpayer’s total income exceeds £150,000 (see below for which tax year);

· their level of regular pension contributions is changed (see definition of ‘regular’); and

· employer and employee contributions total more than £20,000 in one tax year.

Where all of these conditions apply a special charge is levied on all non-regular pension contributions that exceed £20,000. This charge is 20% for 2009/10, and it is designed to reduce the tax relief on those pension contributions from 40% to the basic rate of 20%.

An individual can be caught by this new anti-pensions rule if he had, or will have, total income exceeding £150,000 in any of these tax years:

2007/08,
2008/09,
2009/10, or
2010/11.

Individuals with variable earnings now have to be very careful about making irregular or increased pension contributions.

Regular contributions are defined as those made quarterly or monthly. Self-employed individuals who make single large pension contributions once or twice a year will be treated as making non-regular contributions, which could be subject to the special charge. We anticipate that representations will be made that the new rules discriminate against the self employed. It is possible (no more) that the rules will be relaxed so as to avoid such unfairness – but no one should plan on this being the case.

Total income is broadly the person’s taxable income before pension contributions exceeding £20,000 per year are deducted, but it includes any salary sacrifices made on or after 22 April 2009 in return for pension contributions made by the employer. The calculation of total income is complex, so if you, or any of your clients, are in this position who want to make one-off pension contributions ask a tax expert for advice.

A guide to pension relief capping can be found here.

Article by guest blogger: Mark Lee from The Tax Advice Network.

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