The budget statement confirmed the rules to restrict pension tax breaks for high earners as from 06/04/2011 and will replace the interim “anti- forestalling” rules introduced in the Finance Act last year.

Basically as from that date anyone with a “high income” will face a “high income excess relief charge” on any pension made for or by them. There will be no £20,000 special annual allowance or protection for established regular funding.

You will be defined as having a “high income” if both the following apply in a tax year:

You have a “gross income” of at least £150,000 and a “relevant income” of at least £130,000. This means that if your relevant income is below £130,000 you will not be regarded as having a high income even if your gross income exceeds £150,000.

Obviously you need to understand what is meant by the terms “gross income” and “relevant income” and “high income excess relief charge”.

“Gross income” is any your employers pension contributions (in a money purchase arrangement) added to other income in that tax year itself and tested against the £150,000 income limit. If you have a defined benefit pension the amount will be valued as the increase in the accrued pension over the tax year multiplied by an age related factor which will vary depending on your age and the normal pension age under the scheme. Pension schemes will be required to supply this information to you within 3 months of a request.

“Relevant income” is not the same as relevant UK earnings but includes total income before personal allowances, other reliefs and deductions but after normal deductions and reliefs. It will no longer be possible to deduct your own pension contributions or gift aid donations from your total income when calculating your relevant income.

“High income excess relief charge” is calculated by adding your total pension saving amount to your reduced net income for a tax year and treating it as the top slice of that income. – Confused? Yes this will need expert help and advice to make sure the charge is correctly calculated. 

Paying the tax charge

The tax charge will always fall on you the “high income” earner – irrelevant of who made the pension provision – and is collected via self assessment. If the charge exceeds £15,000 it can be paid off over 3 years (interest will apply) or the pension scheme can pay the charge but your rights under the scheme will be reduced.

There are exemptions if you draw a serious ill health lump sum or die before drawing your pension. 

Conclusion

High earners will therefore need to carefully investigate their overall financial plan and consider alternative means of long-term retirement planning. Good financial planning is essential.