This increase in NI contributions will make salary sacrifice schemes even more attractive than they are currently.
Disappointing as this extension of the anti-forestalling measures is, it's important for individuals to maintain (or even increase if there's scope) payments to their pension schemes. Payments that don't attract the special annual allowance charge will continue to receive tax relief at the highest rate paid by the individual (which could be up to 50%).
The report makes it clear that an 'appropriate' taper will apply, so where some of the contributions would otherwise have received tax relief at 50% and some at 40%, the taper relief will operate to ensure that all such contributions receive the equivalent of basic rate tax relief.
It's possible that someone caught by the anti-forestalling measures will not have tax relief restricted from 2011 because adding in employer contributions does not bring relevant income up to or over the £150,000 limit.
It's unfortunate that full implementation of auto-enrolment has been put back further. One effect of minimum contributions being phased in over a longer period may be that employers are more likely to 'level down' to the minimum required.
The Lower Earnings Limit (LEL) is increasing from £95 per week to £97 per week with effect from 6 April 2010. All other rates and thresholds for 2010/11 are unchanged from the 2009/10 figures.
We already knew that NI contributions were increasing by 0.5% from 6 April 2011. This increase will now be a 1% increase, bringing the contracted in rate for earnings between the primary earnings threshold & the Upper Earnings Limit (UEL) to 12% for employees and 13.8% for employers. The primary earnings threshold will increase from £5,715 per annum to £6,285 per annum for 2011/12 to compensate the lowest earners for the increase.
The employee contribution rate on earnings above the UEL (£844 per week) which was due to increase from 1% to 1.5% will now increase to 2%.
The special annual allowance and accompanying charge were introduced in Alistair Darling's Budget speech of 22 April 2009. We explained the details of how this affected pension planning in our 2009 Budget Summary.
The anti-forestalling measures affected those with incomes of £150,000 or over but the Pre-Budget Report 2009 extends the scope to those with incomes of £130,000 or over.
The anti-forestalling rules that apply to those with incomes of £150,000 or more remain in place but from 9 December 2009, similar rules apply to those with incomes of £130,000 or more. So from that date, for those affected by the new measure:
The Finance Act 2009 gave few details about how tax relief was to be restricted from 6 April 2011, other than that relief would be tapered for those with incomes of £150,000 or more until for those with incomes of £180,000 or more, relief would be restricted to basic rate.
The pre-budget report puts more flesh on the bones but the Treasury will consult with the industry on details such as what 'steps' the taper should reduce by, how defined benefit contributions should be valued and methods of paying any resultant tax charges.
The restrictions will continue to apply to those with incomes of £150,000 or more. However for those with incomes of £130,000 or more, any employer pension contributions will be added to relevant income for the purposes of establishing whether or not their income reaches the £150,000 limit.
Occupational pension schemes can return employee contributions where the member leaves after less than two years service (short service refund lump sums). Currently, this payment is taxed at 20% of the first £10,800 and 40% thereafter.
For payments made after 6 April 2010, tax will be at 20% of the first £20,000 and 50% thereafter. This is outlined in the same report section as the new measures affecting the special annual allowance charge.
The Government's plans for employers to auto-enrol eligible employees into a Qualifying Workplace Pension Scheme (QWPS) are to be phased over a longer period, five years instead of four.
Small employers are not expected to have to auto-enrol before October 2015. This means that the 1% employer contribution will apply until October 2016. Only at that point will the level of required contribution increase. The revised timetable of contributions is expected to be:
Further details are expected in January 2012.
Basic State Pensions will increase by 2.5% from 6 April 2010. This will increase the full Basic State Pension for a single person from £95.25 per week to £97.65 per week and the rate for a married couple from £152.30 per week to £156.15 per week.
Published 11 December 2009
The information provided is based on our current understanding of the Pre-Budget Report 2009 and associated documents and may be subject to alteration as a result of changes in legislation or practice.