The Chancellor announced that relief for pension contributions is to be restricted as from 6 April 2011. In itself this restriction, though unwelcome, will be easy to follow.

However, the anti-forestalling provisions that apply between 22 April 2009 and 5 April 2011 are complex and potentially punitive.

Baker Tilly analysis

The restriction on pension contributions from 2011/12 onwards follows on the introduction of the 50% top tax rate in 2010/11. The anti-forestalling provisions are extremely complex and threaten to penalise innocent contributors to pension schemes.

In detail

The Budget notices are heavy on the detail of the effect of the anti-forestalling provisions that apply for 2009/10 and 2010/11 but the mechanics of the tapering of the rate of tax relief will also require careful scrutiny when the draft legislation is published. The rate of relief will be tapered down from 50% to 20% pound for pound of income over £150,000, so that the rate of tax relief for contributions will only be 20% once the individual’s income exceeds £180,000.

There will also be particular problems for anyone planning pension contributions in the current year. The anti-forestalling provisions are intended to penalise anyone who makes extra contributions before the new rules come into effect on 6 April 2011. Some relief is allowed for existing, regular contributions but anyone starting to pay pensions in 2009/10 will be particularly at risk.

The proposed rules are unnecessarily complex and prescriptive. It is hoped that on reflection these provisions which, after all, only apply to contributions within the annual limits, will be reconsidered and replaced by less draconian rules.

This will be an area where every case affected will require detailed consideration on its individual merits.

The government will be consulting on how precisely the restrictions are to apply and it must be remembered that at present all we have are outline statements of intent. What is clear is that there will be particular problems for:

• defined benefit schemes where the contributions necessary to maintain contractual pension entitlements may not be in accordance with past patterns of payment; and
• salary sacrifice arrangements;
• HMRC are aware of such arrangements and seem to review them as potentially abusive, and so can be expected to push for a hard line in countering their effects.
• The effect of counteraction on schemes appears likely to be peripheral as counteraction notices, and demands for tax, will be served on the individual taxpayers.