Pensions & Annuities - New Rules For £150,000 + Earners

The 2009 Budget contained draconian measures for higher earners, and in particular those earning in excess of £100,000 per annum commencing April 6th 2010. These lose the valuable tax-free allowance at the rate of £1 for every £2 in excess of £100,000 in income. For those with earnings of £150,000 the measures are even more severe as they will face a) losing their tax-free allowance b) a new tax band of 50% on all earnings over £150,000 and c) the imposition of a gradual reduction in tax relief on pension contributions. There are transitional measures in place for 2009/10 to block larger than usual contributions ahead of the new rules.

In essence earnings between £150,000 and £180,000 will see a reduction of higher rate tax relief on a tapered basis so that contributions in excess of £180,000 will only, in effect, receive tax relief at the basic rate, i.e. 20%. The levels of contributions include those made by the employer thereby excluding any type of salary sacrifice to get around the measures. Given that many of these high earning investors are likely to pay higher rates of tax on the eventual pension in payment, they may not consider it attractive to pay the higher rate on benefits when they have not received full tax relief on contributions. The obvious conclusion may therefore be to limit pension contributions to the level of higher rate tax relievable sums. We understand that contributions already in place prior to the budget statement will be ring fenced and will avoid the new measure.

What alternative investments remain open for such investors?

To reduce income tax you might consider EIS or VCT investments as they both provide some tax relief immediately at 20% and 30% respectively. Capital is not locked up as is the case with a pension and capital gains are tax - free following qualifying periods. A brief summary is available in our ‘Tax Savings’ section. Investors wishing to shield higher rates of tax on capital investment returns might consider Investment Bonds, Capital Gains targeted funds or indeed ISA’s as the new increased limits provide more incentive, and again you can read more in the ‘Tax Savings’ section.

If reducing taxation now and in the future is a prime consideration and you wish to discuss this please let us know as in most cases we are able to provide solutions that are acceptable from a risk and practical perspective.