UK Pensions Tax Relief Cuts Announced

by Amanda Banks, Tax-News.com, London

15 October 2010

UK Financial Secretary to the Treasury Mark Hoban, announced on October 14 that the annual allowance for tax-privileged pension savings will be reduced from GBP255,000 to GBP50,000, and that the lifetime allowance will be reduced from GBP1.8m to GBP1.5m.

The latest proposals will replace the complex proposal legislated for by the last UK government in the Finance Act 2010, and is expected to generate GBP4bn per annum for UK coffers. According to Hoban, 100,000 pension savers will be affected by the move, and 80% of those affected will have annual incomes in excess of GBP100,000.

The Treasury said that "to protect individuals who exceed the annual allowance due to one-off 'spike' in accrual, the government will allow individuals to offset this against unused allowance from previous years."

The reduced annual allowance will be introduced from April 2011, with the reduction in the lifetime allowance from April 2012.

Hoban stated:

"We have abandoned the previous government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.”

“The coalition government believes that our system is fair, will preserve incentives to save and, compared to the last government’s approach, will help UK businesses to attract and retain talent."

PKF Accountants, in comments on October 14, welcomed the replacement of "a horrendously complicated claw-back system," proposed under Labour.

Andrew Penman, Director of Private Client Tax Services at PKF, commented of the changes:

“These rules will be simpler for most as the maximum pension contribution that you can pay and get tax relief on will be set at GBP50,000 and tax relief will be given at your top rate, not hugely different from the rules prior to ‘A day’ (April 6, 2006). However, just like the last Chancellor, George Osborne could not resist introducing some transitional rules that take effect from today and will make matters very complicated for some individuals making large annual contributions.”

“Under the new rules, from 2011/12, individuals will only get tax relief on annual pension contributions of up to GBP50,000 no matter how much larger their earnings are. This is a dramatic reduction from the current maximum annual allowance of GBP255,000.”

“If an employer makes payments that take the total contributions for an individual over the GBP50,000 annual allowance, the employee will be hit with a 40% penalty charge. This could particularly hurt individuals in defined benefit schemes where the employer’s deemed contribution is calculated based on a multiple of the increase in the individual’s pension entitlement during the year. Even worse, the multiplier used will increase from 10x currently used, to 16x from next year and employers will also face extra paperwork each year to give employees sufficient information to self-assess, whether or not a penalty charge is due.”

“Most individuals’ personal pension contributions are less than GBP50,000 a year so they are unlikely to be affected. However high earners, middle-income earners nearing retirement and those lucky enough to be members of defined benefit schemes, could face additional tax charges or be severely restricted in their options.”

Frank Williamson, Managing Director of PKF Financial Planning Limited, added:

“High earning individuals, particularly those nearing retirement, should investigate their options for making maximum contributions before April 6, 2011, to get the most into their pension pot while they can. As often happens, it is not until a benefit has been removed that we appreciate the real value of it. In recent years, pension funds have been subject to negative publicity, largely due to life expectancy and falling interest rates, when in fact they provide an excellent tax break for high earners and owner managers in particular. The anti-forestalling rules may limit their net tax relief to 20%, but that still means you have a final chance to get a maximum government subsidy of up to GBP51,000 this year.”

“Owner managers should also now consider making large pension contributions through their company to get as much as possible into the tax-free environment of the pension fund before the lower annual allowance takes effect. The same applies to those in successful professional partnerships. I would advise individuals to seek advice sooner rather than later, as IFAs will be increasingly busy in the run up to April 6, 2011.”

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