Pension anti-forestalling provisions - amendments made to the 2009 Finance Bill

Following uproar from the self-employed and representations from professional bodies, the Government has made some amendments to the anti-forestalling provisions in the Finance Bill. What are the changes and do they go far enough?

What are the anti-forestalling provisions?
The anti-forestalling provisions were announced in the 2009 Budget and take effect from 22 April 2009. They were introduced as a means of preventing taxpayers from making artificially large pension contributions prior to 6 April 2011 in order to benefit from relief at 40% (or 50% from April 2010), before the rate of relief for higher earners is restricted from 6 April 2011. The amount of relief available will be tapered for individuals with income between £150,000 and £180,000 ,from 50% (the new higher rate tax rate for individuals earning over £150,000) down to 20%, with only basic rate relief available where income exceeds £180,000.

The anti-forestalling rules will apply to those individuals who are treated as having 'relevant income' of £150,000 or more.

What is relevant income?
Relevant income includes total income before personal allowances, pension contributions, other reliefs and deductions but after normal deductions and reliefs, eg trading losses, pension contributions up to a maximum of £20,000, and gift aid.

The relevant income for the two previous tax years also is taken into account. For example, if your relevant income was less than £150,000 in 2009-10, you could still be subject to the restricted relief for that year if your relevant income was £150,000 or more in 2007-08 and/or 2008-09.

Any income sacrificed for pension contributions, as part of a salary sacrifice arrangement entered into after 22 April 2009 will also have to be added back in order to arrive at relevant income when looking at the £150,000 threshold.

In addition, a person is treated as having relevant income of £150,000 or more if there is a scheme the main purpose, or one of the main purposes, of which is to secure that the individual’s relevant income for the tax year is less than £150,000.

What is the issue the amendment sought to alleviate?
Where regular pension contributions continue as previously made, the provisions do not take effect. Similarly, where 'excess' contribution made do not exceed £20,000, there will be no restriction of relief. Where contributions do exceed £20,000 there will be a 20% tax charge in 2009/10 to clawback the relief received at 40%.

However, the rules as originally proposed only recognised contributions as regular where they were made quarterly or more frequently. This definition was decried as discriminatory against, for example, the self-employed who will often make annual contributions once their profits for any given year have been established.

What has changed?
The 2009 Finance Bill is now at the Report Stage, and last week the Government tabled some amendments to the law, which were accepted.

The amendments insert a new paragraph 16A into the legislation which allows for infrequent contributions. The average of contributions made in the three tax years from 2006/07 to 2008/09 is taken, which is defined as the 'relevant mean'. If the contributions in those three tax years have exceeded the annual allowance for pensions (£215,000 in 2006/07, £225,000 for 2007/08 and £235,000 for 2008/09), the contributions will be treated as being equal to the annual allowance.

Where the relevant mean exceeds the £20,000 limit, as above, for infrequent contributions only, the limit below which relief is not restricted is extended to £30,000, or the amount of the relevant mean, if lower.

This means that those making infrequent contributions will now be able to benefit from full relief to the lower of £30,000 and the average contributions, instead of the £20,000 for those making more frequent regular contributions.

Clive Fathers, Head of Employer Solutions at Grant Thornton says: "While this extension of the relievable limit for those with infrequent contributions is welcomed, many will argue it does not go far enough. Those making regular annual contributions in excess of £30,000 will still find themselves disadvantaged compared with those making the same total contributions on a quarterly or monthly basis."

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