Pre-Budget Report 2009
On 9 December, the Government published the Pre-Budget Report. A number of the announcements relate directly to pensions, and the majority are as the result of the introduction of a new additional higher rate income tax band of 50% for taxable income over £150,000.
VAT
It has been confirmed that from 1 January 2010 the rate of VAT will return to 17.5% from the temporary rate of 15%.
State Pension
In April 2010, the basic state pension will increase by 2.5% resulting in a weekly payment of £97.65. The full couples’ rate will increase to £156.15 per week.
National Insurance Contributions
It was previously stated by the Government that from 2011-12 the main rates of Class 1 and Class 4 NICs will be increased by 0.5%. The Pre-Budget Report announces an additional 0.5% rise from April 2011. To protect individuals on modest incomes, the primary threshold and lower profits limit will increase significantly in 2011 so that those earning less than £20,000 are not expected to see an increase in their NI contributions.
Short Service Refund Lump Sums
The tax charge on a short service refund lump sum (SSRLS) will be amended to reflect the introduction of the 50% income tax rate introduced from 6 April 2010. The first £20,000 of a SSRLS will be taxed at 20% (increased from £10,800), and the excess will be taxed at 50%.
Special Annual Allowance
The Special Annual Allowance (SAA) was introduced from 22 April 2009 as a forerunner to the tax restrictions on pension savings that will be introduced from April 2011 (see July's edition of Pensions Express.)
Two amendments to the anti-forestalling regime have now been published:
- Provisions for 2009/10
The anti-forestalling provisions which introduced the Special Annual Allowance have been extended to cover individuals with income over £130,000 in the tax year. The rules under which this will operate mirror those already in place for individuals earning over £150,000, but the date of 9 December 2009 replaces 22 April 2009 when determining whether pension savings are protected, and whether a salary sacrifice arrangement can be excluded from the calculation of relevant income.
- SAA charge for 2010/11
From 6 April 2010 the special annual allowance charge will be set at the ‘appropriate rate’. The appropriate rate is determined by the rate of tax relief given on the amount of their pension savings which exceeds their special annual allowance and will restrict tax relief on that excess to the basic rate of income tax.
Further details on how this will operate in practice have yet to be released.
Consultation Published on Tax Relief Restriction on Pension Savings from 2011
In the 2009 Budget, the Government reiterated that tax relief would be restricted from April 2011 for individuals with gross incomes of £150,000 or more. The Government is now consulting on the detail of how this will work in practice.
This restriction will be on a tapered basis so that an individual earning over £180,000 will only receive tax relief at the basic rate of income tax – 20%. In calculating how the taper will work, the definition of gross income will now include the value of employee and employer contributions. However, if an individual’s income is less than £130,000 without including the value of the employer’s contribution, then they will not be subject to the tax relief restrictions.
The valuation of contributions to a DC scheme is relatively straightforward, but valuing DB benefits is much more problematic. There were three main valuation options identified; flat factors, cash equivalent transfer values and age-related factors, but the Government’s preferred option is the application of age-related factors that vary depending on a scheme’s normal pension age.
The intention is not to restrict tax relief through current net pay arrangements, but for the individual to pay a tax charge reflecting the excessive tax relief through self-assessment. It is acknowledged that some flexibility is required to pay what could be particularly high tax charges, so proposals put forward include reducing pension benefits to reflect the charge or spreading of payments over three years in certain circumstances.
2012 Reforms
There were rumours prior to the Chancellor’s speech that the implementation of automatic enrolment and the personal accounts scheme would be delayed.
The Pre-Budget Report does not set out anything specific and the Personal Accounts Delivery Authority (PADA) has released a statement to say the reforms are going ahead as planned. However, we believe there will be some amendments announced early next year regarding the detail around the implementation of the employer duties.
Public Sector Schemes
Employer contributions will be capped to the NHS, Teachers, Local Government and Civil Service pension schemes, thereby limiting the liability of the taxpayer. It is expected that public sector employees will make a greater contribution with those earning more than £100,000 paying more to meet costs. The actual detail has yet to be made available.
