60% Tax Relief on pensions?
I have my old friend, and former enfant terrible of the actuarial world, Andy Tamlyn to thank for this BeeLine. Andy contacted me recently to say it appears that following the recent Budget changes some people earning between £100,000 and £150,000 could effectively get†up to 60% tax relief by making sufficient pension contributions under the new rules.
This is based on the assumption that pension contributions come off gross income before the application of the personal allowance. If this was the case then a pension contribution could be used to reduce taxable income to no more than £100,000, thereby preserving the full personal allowance. The interaction of this and normal tax relief would indeed result in marginal tax relief of up to 60% (for those earning up to £112,950 pa).
Unfortunately, thatís not exactly how it works for personal pensions; for relief at source, personal allowance is deducted from total gross income before the deduction of pension contributions. But it seems it could work in such a way for occupational schemes which use the net pay arrangement rather than relief at source arrangements. This tallies, in fact, with an example given in HMRCís Supplementary Note and Examples (part of the Budget 09 stuff on the website), but Iím sure itís an unintended consequence of the Budget changes.
In my view, even for the net pay arrangement, this would likely be caught at the self-assessment stage anyway and I really canít believe it is the Governmentís intention to create an unfair advantage for the net pay arrangement. My guess is weíll see some changes made to the 2009 Finance Act that will knock this anomaly on the head.
This is a good example, though, of how unintended consequences can occur when changes are made to our hopelessly complex pension system. Itís not that long ago, is it, since we were promised we would have just one set of pension rules applying to all of our pensions?
Whoís for another A-Day?
9 June 2009
Source: HMRC website -†'Additional Rate of Income Tax and Income Related Reduction of the Personal Allowance from 2010-11; Supplementary Note and Examples'.
†Follow the BeeHive on www.twitter.com/PensionsGuru
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