Business owners, the self-employed and partners in law and accountancy firms will still be prevented from making large annual contributions to their pensions with full tax relief, under government amendments to the Finance Bill. Limits on “irregular” pension contributions are to remain in place, and a new maximum of £30,000 a year will be available only to those who have paid in higher sums in the past.
These amendments were tabled last week following widespread criticism of pension tax changes announced earlier this year.
In the Budget, chancellor Alistair Darling said tax relief on pension contributions would be tapered down from the higher rate of 40 per cent to the basic rate of 20 per cent for those with incomes over £150,000, from April 2011. But to prevent high earners making substantial contributions before then, while tax relief was still available to them at 40 per cent, the government has also introduced “anti-forestalling” measures. These limited the amounts eligible for higher-rate relief to “normal ongoing regular pension savings”, or £20,000 a year, whichever was higher.
However, “normal” contributions were defined as those made in a monthly or quarterly pattern, and therefore excluded the annual contributions typically made from year-end profits or bonuses by business owners, the self-employed and partners in professional firms. Employees already paying monthly or quarterly contributions were not affected, though, and so could continue to contribute the full value of their salaries up to £245,000 a year – 10 times more than a self-employed person paying annually.
Under the proposed amendments, the limit on irregular or annual contributions will be increased to £30,000 or the average of the past three years’ contributions, whichever is the lower. If that average is less than £20,000, the existing £20,000 limit will apply.
So, a self-employed individual who paid in £35,000, £38,000 and £40,000 in the past three tax years – an average of £37,667 – will be allowed to contribute £30,000 with 40 per cent relief in tax years for 2009/10 and 2010/11. But an individual who paid in £15,000, £20,000 and £25,000 – an average of £20,000 – will only be able to contribute that average amount each year.
John Lawson, head of pensions policy at Standard Life, criticised the amendment for discriminating against the self-employed. “By raising the limit to £30,000 for annual contributions, the government has made only the meagrest of concessions to the self-employed and small business owners most affected by these proposals,” he said. “Those in company schemes who pay pension contributions monthly are treated more favourably because they can protect their full historic contribution level without limit. There is no justification for penalising entrepreneurs in this way.”
Before the amendment was tabled, the financial secretary to the Treasury, Stephen Timms, met representatives of the Association of British Insurers (ABI) to discuss concessions for those making irregular contributions. But the ABI has said it wants to see more changes to the rules. “We will continue to press for further relief for unfair cases to be dealt with through regulations,” said Peter Vipond, the ABI’s director of financial regulation. “We maintain that the changes in pensions tax announced in the Budget were a retrograde and misguided step.”
However, KPMG welcomed the amendment’s recognition of established savings patterns. Lee Jagger, head of corporate pensions, said: “This is better news for those people who make annual contributions to pension funds, although clearly not as good as if the amendment had simply allowed individuals to continue contributing in line with their average contributions of previous years.”
Jason Butler of Bloomsbury Financial Planning also pointed out that the new limit effectively represented a “£2,000 tax saving” for some, as it extends higher-rate relief to another £10,000 of contributions.
