Investors aged over 50 on 6th October 2009 have an advance opportunity to invest up to £10,200 after that date and counting in  the current tax year.

With stock markets showing signs of recovery and some confidence returning now is a good time to consider investing and making the most of the increased allowance.

For more information and for a free no obligation conversation or meeting please call 0845 30 50 222

We all know that there is a looming pension crisis in this country and all the major political parties agree that pension reform is essential. In the past decade we have had various initiatives to try and stimulate more pension contributions such as Stakeholder pensions and the 2006 Pension Tax Simplification reforms. There have also been reforms introduced to the State Pension schemes with more to follow.

However, perhaps the biggest and most important reform is just around the corner. The above mentioned initiatives have largely failed to encourage the Great British public to contribute to a pension scheme and so the Government are going to the next obvious step. From April 2012, pension contributions will be compulsory for all employees and employers. For employees who do not have an employer’s pension scheme available to them, a new scheme (largely based on the existing personal pension rules) called Personal Accounts will be introduced to accept their pension contributions. A new body has been formed, PADA (Personal Accounts Delivery Authority), and they will be responsible for delivering this new scheme. However, whilst the topic of Personal Accounts has been the source of most discussion over recent months, I believe that it will be Auto Enrolment that should and will focus most Employers minds.

Under Auto Enrolment rules, employees will be automatically enrolled into a pension plan – it will not matter whether that scheme is a Personal Account, a personal pension or a group personal pension. If the employee does not want to join a pension scheme they will have to elect to ‘opt out’ of pension contributions (this decision will be reviewed periodically with the objective to ultimately auto enrol all employees). If an employee does not elect to opt out the employer will also have to make a pension contribution. It will be the employers’ responsibility to deduct contributions from their employees and make sure the contributions go to the relevant pension scheme and it will also be Employers who are saddled with the task of ensuring that their employees are enrolled or opted out. Not only will they have to find extra revenue to make an employer pension contribution to their employees pension fund, they will also face the prospect of fines and even the threat of a prison sentence if they or their employees breach the rules.

Many employers and business owners will not be aware of any of this, and as these rules will be with us with in 3 years it will have a major impact on their business plans.

If there’s any moral to the tale of Auto Enrolment, it’s seek advice at the earliest opportunity.

Please call us on 0845 30 50 222

In anticipation of this change, there will be special rules which will apply from Budget Day (22 April 2009) to prevent people from making large additional contributions to their pensions before then in order to benefit from higher rates of tax relief while it is still available.

These changes do not affect the vast majority of individuals. They affect only those who have a total annual income of £150,000 or higher in the current tax year or in either of the preceding two tax years. More information is in Budget Note 47 and in the guidance notes, so I’ll reproduce the essence of BN47 here:

Budget Note 47 – Overview

the Government intends from 6 April 2011 to restrict tax relief for individuals with an annual income of £150,000 or more. Relief will be tapered away so that for those earning over £180,000 relief will be worth 20 per cent, the same as to a basic rate taxpayer, and the Government is introducing new rules to apply from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals. The restrictions will apply to people

• whose income is £150,000 or higher
• who change their normal ongoing regular pension savings, and
• whose total pension savings exceed £20,000.

This will remove the advantage to those individuals of increasing their pension contributions in excess of their normal pattern.

The special annual allowance, which is set at £20,000, sets an upper limit on the amount of additional pension savings for which full tax relief at the higher rates of tax can be given. Tax relief on additional pension savings above the amount of this allowance will be at the basic rate of tax only. The special annual allowance tax charge which restricts relief on additional contributions to basic rate is a charge on the individual, collected via their Self Assessment tax return. The rate of charge is the difference between the highest rate of income tax and basic rate (20% for 2009-10).

Who do the changes affect?

The vast majority of people will not be affected by these changes.

The changes will not apply to anyone whose total annual income is less than £150,000 and was less than £150,000 in the previous two tax years.

The changes will not apply even if their total annual income was £150,000 or more if they continue as normal with their existing regular pension contributions and accrual of pension benefits (including any employer contributions) and do not increase these pension savings on or after 22 April 2009.

The changes will not apply if their total annual income was £150,000 or more and they increase their pension savings or accrual of pension benefits, provided their overall annual pension savings or benefit accruals are less than £20,000.

The following examples show how the income limit will apply:

A has income of £55,000 in 2007/08, £58,000 in 2008/09, £59,000 in 2009/10 and £60,000 in 2010/11. Since his income is less than £150,000 in all years, he is not affected by the new special annual allowance charge.

B has income of £158,000 in 2009/10 and has total individual and employer pension contributions to a money purchase scheme of £15,000 in the year. Although her income exceeds the £150,000 threshold, her total contributions are less than the £20,000 special annual allowance so she is not subject to the special annual allowance tax charge.

C has income of £158,000 in 2010/11 and makes contributions to her personal pension scheme of £24,000 during the year of £2,000 per month, something she has done for the previous 2 years. Her income exceeds the £150,000 income threshold. Although her pension contributions are more than the £20,000 special annual allowance, they will not be subject to the special annual allowance tax charge because they only reflect her normal regular contributions.

D has income of £170,000 in 2010/11 and makes total pension contributions of £50,000 to his personal pension scheme. The contributions reflect a regular monthly contribution of £2,000 (as for previous years) and a single payment of £26,000. D’s income exceeds the £150,000 income threshold and his pension contributions are more than the £20,000 special annual allowance. However, his normal regular contributions of £24,000 are not subject to the special annual allowance charge. The additional single contribution of £26,000 will be subject to the special annual allowance tax charge.

E has total income of £120,000 in 2009/10 and contributes a total of £30,000 to a personal pension scheme that year. Although his income is less than £150,000 for 2009/10, because his contributions are greater than £20,000 he needs to check his income for the previous 2 tax years. His income was £110,000 in 2007/08 and £125,000 in 2008/09. E will not be affected as his relevant income is less than £150,000 even though his contributions are greater than £20,000.

In 2010/11 E’s total income has risen to £170,000 and he contributes a total of £15,000 to his personal pension scheme in that year. E will not be affected as although his relevant income for 2010/11 is greater than £150,000, his contributions for that year are less than £20,000.

Income

The special annual allowance charge affects only people with ‘relevant’ income of £150,000 or more. Broadly, for the purposes of the special annual allowance this is

• your total income before pension contributions, personal allowances and other reliefs and deductions,
• less any normal deductions for reliefs (such as trading losses) including deductions for pensions contributions but up to a maximum of £20,000,
• less any gift aid deductions as per normal

But in calculating your ‘relevant’ income you must add in any amount of employment income foregone by salary sacrifice in return for pension contributions or additional pension benefits if the agreement was put in place on or after 22 April 2009.

Individuals will be affected only if their relevant income is £150,000 or more in the tax year, or in either of the previous two tax years.

If you, or clients of yours need any further explanation or clarification of the issues raised in this article, then call us on 0845 30 50 222