Pre-Budget Report 2009

Alistair Darling delivered the 2009 Pre-Budget Report on 9 December 2009. We've summarised here the key changes affecting pension schemes and the pensions industry.
Our view

National Insurance Contributions increased

This increase in NI contributions will make salary sacrifice schemes even more attractive than they are currently.

Anti-forestalling extended

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%).

Consultation on the restriction of tax relief from 6 April 2011

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.

Auto-enrolment contributions re-phased

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.

What the Report says

National Insurance Contributions increased

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%.

Anti-forestalling extended

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 special annual allowance charge will apply to additional pension savings that bring total pension payments over the higher of the special annual allowance and any normal regular savings already being made (protected pension input amounts) at 8 December 2009
  • similar to the £150,000 limit, the £130,000 limit applies to those with incomes at or above that figure in the 2007/08 and 2008/09 tax years as well as the current one
  • the tax charge only applies to additional savings made on or after 9 December 2009; normal regular savings that were in place before 9 December 2009 are unaffected, whatever their value
  • the special annual allowance and the charge that applies will (again as before) be £20,000 or between £20,000 & £30,000 if 'infrequent' payments have been made. 'Infrequent' payments are defined as those being made less frequently than quarterly and the average of these over the previous three tax years (capped at £30,000) can establish a higher special annual allowance
  • from 6 April 2010, taxable income above £150,000 will be taxed at 50%. From that date, the special annual allowance charge will be set at 'the appropriate rate'. The appropriate rate depends on the amount of tax relief given on affected pension savings. The rate will be that required to restrict tax relief on those savings to 20%. So, if all the affected savings received tax relief at 50%, the special annual allowance charge would be 30%
  • all other anti-forestalling rules established by the Finance Act 2009 apply in the same way to the new 'population' of high earners.

Consultation on the restriction of tax relief from 6 April 2011

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.

Tax on short service refund lump sums increased

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.

Auto-enrolment contributions re-phased

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:

  • October 2012 to October 2016 - minimum of 2% of qualifying earnings with at least 1% from the employer
  • October 2016 to October 2017 - minimum of 5% of qualifying earnings, with at least 2% from the employer
  • from October 2017, minimum of 8% of qualifying earnings, with at least 3% from the employer.

Further details are expected in January 2012.

Basic State Pension

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.

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