Protecting existing payments
Changes announced in the Chancellor’s budget speech normally apply from the following tax year, or once specific legislation has been introduced. The 2009 Budget differed because anti-forestalling legislation was brought in which was effective the day after the budget speech on 22 April 2009. A similar approach applied to the further measures brought in by the pre-budget report on 9 December 2009.
Rather than repeat the two dates throughout this text, we will just refer from now on to the 22 April date that applies to relevant incomes of £150,000 or more but you should substitute 9 December for those with relevant income of £130,000 or more to whom the measures apply from that date.
Pre-22 April payments
Payments made before midnight on 22 April are not subject to the special annual allowance charge but do not provide protection for future payments unless the payments are also protected pension input amounts (PPIAs).
A client made a contribution of £55,000 on 20 April 2009. This is received by the scheme at 10.00am on 23 April.
This is not a pre-22 April payment as it was received too late.
To qualify as a pre-22 April payment a single payment must have been received by the scheme by midnight on 22 April 2009, whether or not the scheme was already in place.
However if a a single payment is made after 22 April 2009 to a group scheme as part of an agreement between an employee and employer, this will be a protected pension input amount. The agreement has to have been in place by 22 April 2009.
Regular payments may qualify as both pre-22 April payments and PPIAs.
In order to ensure existing savers are not retrospectively affected, measures were put in place to ensure existing pension contributions are protected against the special annual allowance charge.
The protection falls into two parts:
1. protected pension input amounts (PPIAs)
2. increases to the special annual allowance.
Protected Pension Input Amounts
Protected pension input amounts (PPIAs) provide protection against the special annual allowance charge for future regular payments, up to the protected amount.
A client submits an application to pay contributions of £500 per month on 20 April 2009. This is received by the scheme on 22 April.
This is both a pre-22 April payment and a PPIA (because the contract is set up for regular premiums).
To qualify as PPIAs existing regular payments had to have been in place or an application form for regular payments had to have been received by the provider by 22 April 2009. It doesn't matter when the first payment was actually paid, it’s the contract that counts.
PPIAs only apply to regular payments which have been made, or contracted to be made, at least quarterly.
PPIAs can comprise payments made by employees, employers and third parties.
A client has made a contribution of £25,000 on the 1st of January every year. These contributions would be pre-22 April payments but they do not qualify as PPIAs.
If the client made another single payment of £25,000 on 1 Jan 2010 this would attract a special annual allowance charge on the excess over £20,000.
It's the amount that matters not who pays it. It is even possible to alter the balance of payments between different parties without attracting the tax charge so long as the overall payment amount is not increased.
Increases to the special annual allowance
A pattern of single payments can also be protected. This is achieved by an increase in the special annual allowance for these individuals, up to a maximum amount of £30,000. The increased allowance is based on the average of payments made in the previous 3 tax years.
Payment in 2006/07 = £20,000
Total annual payment over 3 years = £75,000
These payments do not constitute a PPIA. Where a client has made both regular payments and infrequent contributions protection isn't based on total payments, but on the higher of the regular or average of single payments made (see example 8).
PPIAs and the special annual allowance
PPIAs don't sit on top of the special annual allowance but overlap with it.
If an individual has a PPIA of less than the special annual allowance (£20,000 or up to £30,000 if applicable), then additional payments can be made free of the special annual allowance tax charge but only up to the balance between the PPIA and the special annual allowance. In other words if the special annual allowance was £20,000, there would be no charge if total annual payments do not exceed £20,000.
If an individual has a PPIA above the special annual allowance that applies then these payments can continue but any additional payments will attract the special annual allowance tax charge.
A client has been making regular payments totalling £15,000 per annum.
PPIA = £15,000
The client’s PPIA is less than the special annual allowance so higher rate tax relief is only available on payments up to £20,000.
A client has been making regular payments totalling £25,000 per annum.
PPIA = £25,000
The client’s PPIA exceeds the special annual allowance so higher rate tax relief is available on payments up to £25,000.
Payment in 2006/07 = £2,000 per month plus £25,000 single payment
Payment in 2007/08 = £2,000 per month plus £25,000 single payment
Payment in 2008/09 = £2,000 per month plus £25,000 single payment
PPIA = (£2,000 x 12) = £24,000
The special annual allowance is greater than the PPIA so higher rate tax relief is available on payments up to £25,000.
Payment in 2006/07 = £2,000 per month plus £35,000 single payment
Payment in 2007/08 = £2,000 per month plus £40,000 single payment
Payment in 2008/09 = £2,000 per month plus £45,000 single payment
PPIA = (£2,000 x 12) = £24,000.
The special annual allowance is greater than the PPIA so higher rate tax relief is available on payments up to £30,000
Note - The information provided is based on our current understanding of the 2009 Budget, the Pre-Budget Report 2009 and associated documents and may be subject to alteration as a result of changes in legislation or practice.
Published 12 January 2010
Updated 9 March 2010