Special Annual Allowance Charge

02-02-2010

Since its introduction in the budget on 22nd April 2009 we have received many calls in relation to the Special Annual Allowance Charge and the accompanying anti-forestalling measures.

To determine whether a client is caught by the current rules the first step is to establish whether, in the 2009/2010 tax year or the preceding two tax years, they have relevant income in excess of £130,000 (or £150,000 for contributions in the period 22nd April to 8th December 2009).

Relevant income for the purpose of the special annual allowance is calculated using the six step process laid out by HMRC:

1. Calculate total income from all sources including earned income, pensions, savings income, dividends, property income etc.
2. Add on any pension contributions paid under a net pay arrangement (e.g. occupational scheme where employer deducts members contributions from gross salary)
3. Deduct any allowable losses and other reliefs claimed under S24 of the Income Tax Act 2007
4. Deduct any relievable pension contributions paid by or on behalf of the member (excluding employer contributions) subject to a maximum deduction of £20,000
5. Add back any amount of salary sacrifice agreed on or after 9th December 2009 (or 22nd April 2009)
6. Deduct amounts of donations that qualify for Gift Aid

• If the result is less than £130,000 (or £150,000) then there will be no Special Annual Allowance Charge regardless of the level of pension contributions made.
• If the result is greater than £130,000 (or £150,000) then the contributions in excess of £20,000 will be subject to the Special Annual Allowance Charge unless:

• They were regular payments (quarterly or more frequent) already in existence prior to the introduction of this legislation.

OR

• The contributions are a contractual condition of employment

OR

• The average of infrequent payments over the previous three years is greater than £20,000, in which case the allowance is the average of these payments, subject to a maximum of £30,000, less any protected regulars.

It is important to note that the current measures are in effect temporary legislation to prevent high earners from topping up their pensions before full legislation comes into force on 6th April 2011.  With a general election looming, a possible change of government and the full legislation still under consultation it really is impossible to say what the eventual provisions will be.