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09 December 2009
2009 PBR SpecialToday's Pre-Budget Report (PBR) presented by the Chancellor of the Exchequer contained a number of significant references to pensions.
Restriction on pensions' tax relief for high earners
The PBR reaffirms the plans announced in this year's Budget to restrict the tax relief given on pension savings to those with "relevant incomes" over £150,000 pa (see our 2009 Budget Special). In particular, it confirms that the restriction on tax relief applies to employer contributions (and certain salary-sacrifices) as well as an individual's own pension contributions.
There appears to be some good news in that individuals with pre-tax incomes (excluding employer pension contributions) of less than £130,000 pa will not be affected by the restrictions and so will not have to carry out a test to check whether their "relevant income" exceeds £150,000 pa. However, the anti-forestalling rules that came into being on 22 April 2009 (the date of the Budget) will be extended from 9 December 2009 (the date of today's PBR) so that all those with pre-tax incomes of £130,000 pa or more become potentially subject to tax if they increase their pension savings.
Employers will be obliged to identify any employee to whom they provide gross pay and taxable benefits of £130,000 or over and to whose pension they contribute. They must also request a benefit statement from the pension scheme on the employee's behalf.
The PBR also launched a consultation by HM Treasury on "implementing the restriction of pensions tax relief". This runs for 12 weeks, ie until 3 March 2010.
One of the key issues considered in HMT's consultation is the way in which the year-on-year increase in the value of a defined-benefit pension is calculated to determine the quantum of "pension saving" for those subject to the special annual allowance. Three approaches are considered:
- a flat-rate factor (such as the factor of 10 currently being used to test against the annual allowance);
- cash equivalent transfer values; or
- either a one-way or two-way table of standard age-related factors (eg by age and normal pension age).
HMT currently favours two-way age-related factors.
The consultation also raises the possibility of individuals being able to ask their pension scheme to pay the special annual allowance charge on their behalf, particularly for members of DB schemes. HMT envisages a series of pension debits being created along the lines of those created under pension sharing on divorce.
Alternatively, consideration is being given to allowing individuals to spread paying the charge over a period of three years.
Other matters
The PBR reaffirms the Government's commitment to implementing private pension reform (such as the introduction of Personal Accounts, automatic enrolment and mandatory pension contributions) but "announces" a change to the timetables for that reform. Some commentators suggested this meant the reforms would not be implemented in 2012 but pushed back a year to save on pensions tax relief, which the DWP is reported to have denied. Our interpretation is that this "announcement" simply confirms the phasing-in of employers' duties as consulted on recently by the DWP.
In the public sector, the NHS, Teachers, Local Government and Civil Service pension schemes will be subject to "cap and share" reforms whereby the Government expects those earning the highest salaries to pay a greater contribution towards the cost of their pensions to limit the liability of the taxpayer.
The PBR also announced:
- a 2.5% rise in the basic state pension
- no change in personal tax allowances between 2009/10 and 2010/11 (although this is presented as being an increase in real terms because inflation was negative in the year to September 2009);
- no change in the inheritance tax allowance (£325,000) between 2009/10 and 2010/11;
- an increase of 0.5% in the employee, employer and self-employed rates of national insurance contributions from April 2011;
- a freeze in the point at which individuals start to pay the higher rate of income tax in 2012/13; and
- a temporary payroll tax on banks and building societies of 50% on discretionary bonuses above £25,000 awarded to each individual employee in the period up to 5 April 2010 (which may be extended).
Comments
With an election looming, one might have expected taxation increases to be focused on those areas where they might be less visible. The squeeze is on, but pensions have largely escaped further attack.
Certain of HMT's proposals for implementing the restriction of pension tax relief appear at first sight to be helpful and in the interests of fairness.
The idea that pension schemes could be used to meet tax charges sets an amazing precedent and raises concerns about increasing complexity. However, the optimist might see it as a first step (or toe in the water) towards greater flexibility in pension funding, addressing many individuals' reluctance to save because their money becomes inaccessible.
A postponement to the introduction of Personal Accounts would have been welcome if only to create a breathing space in which the DWP could consider and introduce risk-sharing approaches, including Collective DC. In its absence, we can but hope that the DWP and legislators will act quickly so that employers have a full range of choice available to them in good time for taking decisions ahead of 2012.
For further information:
Gary TansleyTel: 01737 841 732
Email: enquiries@hamishwilson.com
