Government announces further details about changes to pensions tax relief
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Issued 03 March 2011 - Treasury
Financial Secretary to the Treasury,
Mark Hoban, announced today how the facility for meeting high annual
allowance (AA) charges from pension benefits will work in practice,
including that the tax should be paid at the point the charge arises.
Schemes will have a considerable
amount of time to complete the payment process, with additional
flexibility being granted in the first year. Individuals with AA
charges above £2,000 will be able to elect for the full liability to be
met from their pension benefit. Schemes will be required to operate
this facility only where an individual has exceeded the AA outright
within that scheme in the relevant year. The Government has given
schemes flexibility in how they operate, but is clear that any
adjustment to an individual’s pension benefit should be fair to all
The Government expects most
individuals and employers to adapt their pension saving behaviour to
avoid incurring a charge by exceeding the AA, and has put in place
measures such as the carry forward of unused allowances to protect
individuals further. However, recognising that, in some circumstances,
individuals could still see high charges reflecting significant uplift
in pension value in a given year, the Government consulted on options
to enable individuals to meet these charges from their pension
The detailed policy specification has
been set out in a summary of responses document and draft clauses.
As announced in October 2010, from
April 2011 the annual allowance (AA) for tax-privileged pension saving
will be reduced from £255,000 to £50,000 and from April 2012 the
lifetime allowance will be reduced from £1.8 million to £1.5
million.This is a simpler and fairer approach to making a more
sustainable and affordable system of pensions tax relief. The reduction
of these allowances will generate around £4 billion annual revenue in
steady state, while preserving incentives to save, and lessening the
impact on UK business to attract and retain talent.
Mark Hoban said:
abandoned the previous Government’s complex proposals and
developed a solution that will help to tackle the deficit, but not hit
those on low and moderate incomes. We have taken a tough, but fair
Government believes that our system is fair, will preserve incentives
to save and - compared to the last Government’s approach - will help UK
businesses to attract and retain talent.”
1. The Government confirmed in the June Budget that
it is committed to the reform of pensions tax relief and would continue
with plans that it inherited to raise revenues from restricting
pensions tax relief from April 2011. It felt that this approach could
have unwelcome consequences for pension saving, bring significant
complexity to the tax system, and damage UK business and
competitiveness. These concerns were shared by representatives of the
pensions industry and employers.
2. The June Budget announced that
the Government was considering an alternative approach to restricting
pensions tax relief, involving reform of existing allowances. A
discussion document on the subject “Restriction of pensions
tax relief: a discussion document on the alternative approach”
was published in July 2010, inviting views on a range of issues around
the precise design of any such regime.
3. Throughout the summer an informal
consultation was held, with a wide range of pensions
professionals, industry bodies, employers and individuals’
representatives across the public and private sector engaging with HM
Treasury and HM Revenue & Customs. The Government received 238
written responses, 183 of which were from organisations. The Government
is grateful to all those who have provided views and participated in
discussions, and will continue to work closely with interested parties
to ensure that the reform is introduced as smoothly as possible.
4. Almost all of the responses
to the discussion document welcomed the alternative approach as a more
workable way of restricting pensions tax relief, and one which would
also preserve incentives to save. However, several respondents noted
the challenges for defined benefit schemes and their members, unless
mitigated by specific measures in the design of the overall regime.
Any reform must be
sustainable in the long-term. The discussion document the Government
published last summer noted that a reduction in the annual allowance to
between £30,000 and £45,000 could achieve this objective.
However, the Government has decided that targeting the lifetime
allowance alongside the annual allowance enables the latter to be
£50,000. This will ensure that fewer individuals on low incomes are
affected by the regime.
Comments are welcome on the draft clauses, which will be included in
the Finance Bill 2011.
7. In order to protect the public finances, it is
necessary to introduce the reduced annual allowance from April 2011.
The Government plans to introduce the reduction in the lifetime
allowance from April 2012.
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Article Published/Sorted/Amended on Scopulus 2011-03-06 18:14:45 in Tax Articles