There have been some more changes to tax relief for higher earners.
It is all my fault. I have been writing and lecturing this year commenting on how simple (if unwelcome) the new rules were, restricting the higher rate relief on pension contributions from 2011. Incurring the wrath of Mr Murphy's or Mr Sod's legislature as I did, Mr Darling therefore decided to have a fiddle in the Pre Budget Report (PBR) last week. With the rules that is!
As if that weren't bad enough, he also decided to further tweak the anti-forestalling rules currently in place as well as making some other adjustments, none of which appear to be particularly in the taxpayer's favour.
The basic premise
The point of the new rules was, quite simply, to restrict the tax relief on pension contributions available to higher earners.
From 6 April 2011, those with income over £180,000 would only be entitled to basic rate (20%) relief on contributions instead of the marginal rate relief at 40% or 50% that would otherwise have applied. Those with an income between £150,000 and £180,000 would have their relief restricted by an as yet undetermined sliding scale.
Now, knowing tax relief on pension contributions is due to be restricted in two years' time is an incredible motivator, encouraging many of these higher earners to consider making larger contributions before the new rules take effect, thereby securing a higher rate of relief. Unfortunately, in an uncharacteristically prescient move, the Chancellor foresaw this outcome and introduced the anti-forestalling rules, which took effect from 22 April 2009.
The aim of these highly complicated temporary rules was to prevent high earners from changing their normal pattern of pension contributions in order to take advantage of higher rates of relief. Sounds simple in theory doesn't it.
The revised new rules following the PBR
The PBR amendments, in simple terms, widen the scope of the legislation restricting relief such that the definition of 'gross income' now includes current, or future, employer provided pension benefits.
Mr Darling made a big fuss of saying that he was also introducing a 'floor' in the application of the rules such that no-one with earnings (under the new definition) under £130,000 would be affected. The more cynical Fools amongst you may surmise that, in practicality, he was merely reducing the limit at which the new restriction applies by £20,000.
That is not necessarily a fair assumption -- if an individual is receiving a modest salary but his employer is contributing £150,000 into a pension scheme on his behalf , most people would agree that, in reality, that individual should class as a high earner for the purposes of this legislation.
However, the document containing the draft legislation specifically states that:
"The consultation document sets out that the restriction will apply to individuals on gross incomes of £150,000 and over, where gross income incorporates all pension contributions, including the value of any pension benefit funded by, or eventually funded by, an individual's employer."
The inclusion of the words 'eventually funded by' has greater significance where individuals are members of a defined benefit, or final salary scheme. If such individuals earn £130,000 it is conceivable that, depending on the individual's age, the cost of providing a pension based on that salary would be valued at £20,000 or more, bringing these individuals into the regime with effect from 9 December 2009 where they previously were not, despite having made no changes to their remuneration.
Interestingly the draft legislation which determines the value of contributions into defined benefit schemes has not actually been drafted yet, which is not a great deal of use to anyone who thinks they may be affected.
Similarly the actual rate of apportionment of relief for those earning between £150,000 and £180,000 has still not been defined, the only guidance being at (x) percent per (y) earnings.
The anti-forestalling changes
The temporary anti-avoidance rules were unpopular, considered unfair to certain individuals (namely the self-employed), and unbelievably complicated. The detail of the rules is covered in my earlier article on the pension changes.
For anyone who was inclined to give Mr Darling the benefit of the doubt on the previous point, there is no beating about the bush with the PBR changes here. With effect from 9 December 2009, anyone earning over £130,000 who changes their 'regular' contributions will now fall within the rules, in the same way as those earning over £150,000 were previously affected.
Pension refunds
Another PBR pension change involved refunds of pension contributions.
Currently, where a pension scheme repays the contributions of a member who has completed less than two years' service, the pension scheme is required to deduct tax at 20% on the first £10,800 and 40% thereafter.
The PBR announced that these rates and limits will be amended to 20% on the first £20,000 and 50% thereafter for refunds made on or after 6 April 2010. As with the National Insurance changes, this is good (or indifferent) news for the 'needy' earning up to £20,000 but bad news for everyone else.
So what do you think of the changes? Clear as mud? As equitable as an Equitable Life pension fund? Hard cheese for the big cheeses?
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