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Pensions rule still under debate

High earners were also shocked to hear that not only would tax relief for pensions be restricted from 2011, but that the Government also intends to restrict their ability to contribute this year and next, in the run up to the new rules.

The restriction, however, is much more limiting than was expected, as it is intended to prevent those affected from increasing their pension contributions in 2009/10 and 2010/11.

But the effect of the rules as drafted mean that many taxpayers earning over £150,000 per annum could be forced to reduce their pension contributions this year.

The problem arises because in determining the “normal” level of contributions paid by individuals the current form of the legislation covers only contributions paid under an agreement dated before Budget day which provides for payments to be made at least quarterly.

Most high earners who are self employed pay annual premiums into a scheme at or near the end of the tax year, when they are certain about their cash and tax position. Those who have their own companies frequently pay company pension contributions as part of a pre year end tax planning exercise carried out with their advisers.

In neither case would these contributions count as “normal contributions” for this purpose, and so the level of normal contributions would be set at zero. The new legislation then allows a special annual allowance of £20,000 for pension contributions under the new restrictions, so affected taxpayers will in these cases be restricted to £20,000 contributions by either themselves or their employing companies in the current and next tax year.

Proposals put forward by the professional tax bodies would change this situation to allow taxpayers to take into account their average pension contributions in the last three years for the purpose of establishing their normal contributions under the rules.

However, the new rules have also been subject to quite severe criticism as complex and unwieldy. The Finance Bill has a very short time available for debate this year, due to the late Budget, so time is very short to get the required amendments put through.

As with all aspects of financial planning it is important to seek professional advice from your usual pensions adviser if you consider that these changes impact on your retirement planning