Vicki Davies, Associate Director,.gif)
National Tax at RSM Tenon
With the Country’s finances still very much in the red it came as no
surprise that the Coalition government
confirmed, in June 2010,
that it would endorse Labours’ proposals to restrict tax relief on
pension contributions. After all, since coming into power their mantra
has been that ‘we’re all in this together’ and the taxpayer is being asked
to bear its fair share of the burden.
It was however, with a huge sigh of relief, that we welcomed proposals to simplify the regime. The original proposals were complex to say the least and many feared that they would be unworkable in practice. So where are we now?
The complex and, at times, extremely punitive, transitional rules have come to an end and a new system has been introduced from 6 April 2011.
From that date, tax relief on pension contributions will be calculated by reference to contribution level and not income. The maximum tax relievable pension contribution is determined by the Annual Allowance and this is being capped at £50,000. In other words, everyone is entitled to tax relief on pension contributions up to £50,000 at their highest rate of tax, regardless of whether that is 20%, 40% or 50%.
There is also a facility being introduced to enable unused allowances to be carried forward from the previous 3 tax years. As advisers to entrepreneurs, we welcome this new provision as it will accommodate those with fluctuating income, typically those running their own business and who have some control over when and how they extract profits, and there will be planning opportunities around this to ensure that unused allowances are not lost.
There is also a limit to the amount of pension funds an individual can build up over their lifetime (known as the Lifetime Allowance) and that limit is reducing from £1,800.000 to £1,500,000 on 6 April 2012. Exceeding the limit could lead to tax penalties unless funds are protected.
In addition, there are some wide ranging changes affecting income in retirement and the taxation of lump sum benefits on death. The maximum allowable income payable as drawdown will reduce but legislation will allow larger amounts to be drawn-down in circumstances where other pension income is guaranteed above a certain level.
It will be possible in future for residual pension funds on death be paid out to beneficiaries subject to tax and the current cliff-edge rule changes that attainment of age 75 require will largely disappear. There will no longer be any requirement to “secure” an income at age 75.
All of these changes are important for high earners, for those already drawing their benefits and for those with large pension funds and/or large accrued pension rights. If you are in any of these categories you should speak to your tax and financial advisor to understand precisely how you will be affected and what you need to do.
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