High earning individuals especially those in defined benefit pension schemes they could suffer 50% tax on the value of personal and employer contributions.
Individuals who have suffered a special annual allowance' in simple terms those high earners who have had pension contributions restricted for tax years 2009 / 2010 and 2010 / 2011to between 20,000 and 30,000.
Those individuals making significant pension contributions or those who intend to make significant pension contributions in the next few years.
Anyone who has used an EFRBS' or EBT' as a means of remuneration in recent years.
Those with pension funds valued in the region of 1.5m or above.
What is happening?
HMRC has recently confirmed the changes to the rules for tax relief on pension contributions from 6th April 2011.
We are delighted that tax relief on personal contributions to registered pension schemes will continue to be available at the individual's highest marginal rate of income tax.
There will also be no change to the way tax relief is provided on pension contributions by companies.
Annual allowance.
The annual allowance will be reduced to 50,000 (currently 255,000) from 6th April 2011.
The 50,000 contribution limit will be fixed initially by might be increased in the longer term.
Where an individual's pension contributions in a tax year exceed their annual allowance he will have the opportunity to use any unused allowance in respect of the three immediately preceding tax years.
To be able to take advantage of this new form of carry forward' provisions in respect of an earlier tax year the individual must have been a member of a registered pension scheme in that tax year. It is not clear yet whether the test is membership' based or contribution' based so we do not yet know whether someone who had a paid up plan is able to take advantage of the carry forward provisions.
The carry forward provisions are based on a notional annual allowance of 50,000 for those tax years.
Where use is made of carry forward the unused allowance will be taken in respect of the earliest year first.
Exemptions.
The exemption from the annual allowance in the final year before retirement is now removed.
The intention is that there will be far fewer exemptions from the annual allowance for example where death occurs or there is serious ill health.
Valuation of defined benefit pension rights.
There will be no annual allowance test for deferred benefits held in defined benefit (final salary) pension schemes.
The fixed factor of 10:1 for valuing defined benefit accrual to test against the annual allowance will be increased to 16:1.
Annual allowance tax charge.
The existing flat rate tax charge will be replaced by a variable tax charge of up to 50% so as to cancel out any tax relief on excess provision above the annual allowance.
Lifetime allowance.
The lifetime allowance will be reduced to 1.5m (currently 1.8m) from 6th April 2012.
This new limit of 1.5m is not likely to be increased in the foreseeable future.
The government has promised consultation on the detail of this proposal including the timing of implementation, the valuation factor for defined benefit rights and the implications for those with transitional protection (Primary and or Enhanced protection) or those who already have pension rights valued in excess of 1.5m where no form of transitional protection currently exists.
The government plans to change the tax regime for EFRBS and EBT so as to eliminate their use as a means of avoiding reducing or deferring tax on remuneration or retirement benefits.
What action should you take?
Expert Financial Solutions Ltd are independent financial advisers and Chartered Financial Planners and can advise you on pension contribution strategy as well as alternative wrappers for tax efficient saving for retirement including stocks and shares ISA, onshore and offshore investment bonds, VCT and EIS.
Email info@expertfs.co.uk
Web: www.expertfs.co.uk
November 2010.
Please note that tax and legislation is liable to change in the future. This information is based on our understanding of current English law and HMRC practice. Tax rates and tax reliefs may change in future; the value of tax reliefs will depend on the personal circumstances of the individual and or company.
Expert Financial Solutions Ltd is authorised and regulated by the Financial Services Authority, our FSA reference number is 401295.
