UK: Tax Relief on Certain Pension Savings
The UK government announced that from 6 April 2011, the availability of higher rate tax relief on pension contributions to U.K.-registered pension schemes will be restricted for those with income of £150,000 or more per annum. Relief will be tapered away so that for those with incomes of £180,000 p.a. or over, it will be restricted to the basic income tax rate (currently 20 percent). (There are no details available yet about how these changes will be implemented in practice – the government intends to consult in due course.)
In the meantime, “anti-forestalling” rules have been put in place with effect from 22 April 2009, to prevent individuals (with incomes of £150,000 p.a. or more) from increasing their pension savings now in order to benefit from the higher rate income tax relief (currently 40 percent and rising to 50 percent from 6 April 2010) before 2011. This is achieved by introducing a special annual allowance (of £20,000 p.a. rising to £30,000 in prescribed circumstances) and associated tax charge for pension savings in excess of the allowance (with an exception for certain ongoing and regular savings). There are also special rules for how the £150,000 p.a.
income threshold is calculated.
Regulations Extending Anti-Forestalling Rules
By way of regulations, the anti-forestalling rules have been extended so that, in addition to U.K.-registered pension schemes, they also apply to U.K.-based members of certain U.K. tax-privileged non-U.K. pension plans.
These are pension plans where U.K. income tax relief/exemption has been obtained by virtue of:
• the “Migrant Member Relief” or “Transitional Corresponding Approval Relief”
• the provisions of a double taxation agreement; or
• where section 307 of the Income Tax (Earnings and Pensions) Act 2003 applies to
exempt an employer’s pension contributions from U.K. tax where the plan is an
Overseas Pensions Scheme (as defined in U.K. legislation).
KPMG Note: New U.K. Pension Rules Can Also Impact International Assignees
It will be important to assess the pension position for all international assignees posted to the U.K. regardless of whether they are participating in their home country pension plans, a U.K.-registered pension scheme, or an international pension plan. Employers, therefore, should review the range of pension arrangements in which assignees to the U.K. currently participate, or in which assignees may participate in the future. This, together with the income levels of those concerned, will determine the potential immediate impact of the anti-forestalling rules. Because of the gross-ups that are often involved for U.K. assignees under tax equalization arrangements, it is quite possible that the £150,000 p.a. income threshold may be exceeded in circumstances, where otherwise it would not be.
Employers might wish to consider identifying and communicating these changes to expatriates that may fall within the £150,000 p.a.-plus income category. In addition, employers, in consultation with their service providers, may wish to consider:
• reviewing their pension strategies with regard to the U.K. tax treatment of non-U.K.
• assessing the potential impact on tax equalization costs;
• reviewing their tax equalization policies, if necessary; and
• reviewing how pension provisions are delivered to the assignees who are affected
(e.g., is it still appropriate to maintain a home country pension plan or could an
alternative plan be offered?).