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Finance Act 2010

Section 23 Schedule 2: Pensions: High Income Excess Relief Charge

Summary

1.Section 24 and Schedule 2 introduce a restriction of pension tax relief to the basic rate for high income individuals, to be known as the “high income excess relief charge”. The charge arises in respect of pension contributions and benefits for individuals whose income, including employer contributions, is £150,000 or more, subject to a floor so that only individuals whose income (excluding employer contributions) is £130,000 or more are affected.

Details of the Schedule

2.Paragraph 2 inserts a number of new sections into Part 4 of the Finance Act (FA) 2004 after section 213 of that Act as detailed below. Together these new sections set out the rules for the high income excess relief charge.

New section 213A High income excess relief charge

3.New section 213A(1) provides for a new charge to income tax for certain individuals who are members of registered pension schemes and who have pensions savings in a tax year. The charge is to be known as the high income excess relief charge.

4.New section 213A(2) provides that the high income excess relief charge applies only to the individual.

5.New section 213A(3) provides that the individual is liable to pay the high income excess relief charge including when the individual and the scheme administrator are not resident, not ordinarily resident and not domiciled in the UK.

6.New section 213A(4) sets the rate of the high income excess relief charge at the appropriate rate in respect of the total pension savings amount. The appropriate rate is determined in accordance with new section 213E.

7.New section 213A(5) provides that the total pension savings amount is not otherwise to be treated as income for the purpose of the Tax Acts.

8.New section 213A(6) provides that income tax in respect of the high income excess relief charge is part of the individual’s income tax liability for the tax year.

9.New section 213A(7) signposts further sections that make provision for the high income excess relief charge.

New section 213B High Income

10.New section 213B defines an individual with a high income by reference to the individual having “gross income” (defined in section 213C) of £150,000 or more and “relevant income” (defined in section 213D) that is not less than £130,000.

New section 213C Gross Income

11.New section 213C sets out how to calculate the individual’s “gross income” for the tax year. The amount of gross income is:

  • the total income of the individual for the tax year (Step 1);

  • plus any pension contributions paid by the individual and donations under payroll giving in respect of which there was a deduction in determining total income at Step 1 above (Step 2);

  • less any income tax deductions and reliefs, other than for pension contributions and gifts of qualifying investments to charities, that are deductible at Step 2 of the calculation of income tax liability in section 24 of the Income Tax Act 2007 (ITA) (Step 3);

  • plus the total pension savings amount after deducting any pension contributions paid by or on behalf of the individual (Step 4).

New section 213D Relevant Income

12.New section 213D(1) sets out how to calculate the individual’s “relevant income” for the tax year. The amount of relevant income is:

  • the total income of the individual for the tax year (Step 1);

  • plus any pension contributions and donations under payroll giving paid by the individual in respect of which there was a deduction in determining total income at Step 1 above (Step 2);

  • less any income tax deductions and reliefs, other than for pension contributions and gifts of qualifying investments to charity, that are deductible at Step 2 of the calculation of income tax liability in section 24 of ITA (Step 3);

  • plus taxable employment income that the individual has agreed to give up under a salary sacrifice or flexible remuneration arrangement made on or after 22 April 2009 (Step 4).

13.New section 213D(2) defines when a ‘relevant’ salary sacrifice or flexible remuneration arrangement made on or after 22 April 2009 exists, for the purposes of Step 4 of the relevant income calculation.

14.New section 213D(3) defines relevant pension provision (as used in the meanings of relevant salary sacrifice and flexible remuneration arrangements) by reference to pension contributions to a pension scheme in respect of the individual .

15.New section 213D(4) defines a connected person by reference to the definition in section 993 of ITA.

New section 213E The appropriate rate

16.New section 213E(1) sets out how to calculate “the appropriate rate” of the high income excess relief charge. Different rates are to be used according to the relevant amounts of the individual’s total pension savings that were relieved at the basic, higher or additional rates of tax.

17.New section 213E(2) explains how calculation of “the appropriate rate” at new section 213E(1) is amended where the individual’s “specified income” is less than £180,000. Adjustments are made in steps of 1 percentage point for every £1,000 change in income.

18.New section 213E(3) defines reduced net income, as used in working out the appropriate rate to be used for the high income excess recovery charge.

19.New section 213E(4) extends the basic and higher rate bands for the purposes of working out “the appropriate rate” where pension contributions have been made under relief at source or gift aid contributions have been made.

New section 213F Total pension savings amount

20.New section 213F(1) provides that the total pension savings amount is determined by aggregating all pension savings amounts in each arrangement that the individual might have under separate registered pension schemes.

21.New section 213F(2) makes reference to new sections 213G to 213N which define pension savings amounts.

22.New section 213F(3) provides for a negative pension savings amount to be treated as nil.

23.New section 213F(4) provides for the total pension savings amount to be reduced by the amount by which the total pension input amount under section 229 exceeds the annual allowance.

24.New section 213F(5) provides a power to exclude from the total pension savings amount, pension savings amounts from arrangements where the individual is a deferred member for the whole tax year and to modify the high income excess relief charge rules for individuals who are deferred members for part of the tax year through regulations if the individual meets the condition in new section 213F(6).

25.New section 213F(6) defines the condition in new section 213F(5) by reference to an individual being a deferred member of the scheme (or would be, where there is more than one arrangement, if the particular arrangement under consideration were the only arrangement under the scheme).

New section 213G Money purchase arrangements other than cash balance arrangements

26.New section 213G(1) defines the pension saving amount in respect of an “other” money purchase arrangement, i.e. one that is not a cash balance arrangement. Money purchase arrangements in general, are defined in section 152(2) and (4) of FA 2004. “Other” money purchase arrangements are simply those money purchase arrangements that are not “cash balance arrangements” (which are defined in section 152(3) and (5) of FA 2004). They are arrangements where the rate or amount of benefits is calculated by reference to an amount available for the provision of benefits, where that available amount is in turn calculated by reference to payments made under the pension scheme. The pension savings amount in respect of such an arrangement is the total of the pension contributions paid by or on behalf of the individual and the employer contributions in respect of the individual in the tax year.

27.New section 213G(2) provides that the pension savings amount in respect of an other money purchase arrangement does not include minimum payments or amounts recovered under section 8 of the Pension Schemes Act 1993 (PSA) or section 4 of the Pension Schemes (Northern Ireland) Act 1993 (PSNIA).

28.New section 213G(3) provides rules for dealing with unallocated employer pension contributions that subsequently become allocated to a particular individual.

29.New section 213G(4) provides for the pension savings amount to be treated as nil in a tax year where the individual becomes entitled to a serious ill-health lump sum or dies.

New section 213H Cash balance arrangements

30.New section 213H(1) defines the pension savings amount in respect of a cash balance arrangement as the “appropriate increase”. Cash balance arrangements in relation to a member are defined in section 152(3) and (5) of FA 2004 as a subset of money purchase arrangements in general as defined in section 152(2) and (4) of FA 2004. They are money purchase arrangements where the rate or amount of benefits is calculated by reference to an amount available for the provision of benefits to or in respect of a member, but otherwise than wholly determined by reference to payments made under the arrangement.

31.New section 213H(2) defines the appropriate increase by reference to the opening and closing rights multiplied by age-related factors.

32.New section 213H(3) defines closing rights.

33.New section 213H(4) defines opening rights.

34.New section 213H(5) provides that the pension savings amount in connection with a cash balance arrangement does not include minimum payments or amounts recovered under section 8 of PSA or section 4 of PSNIA.

35.New section 213H(6) provides for the pension savings amount to be treated as nil in a tax year where the individual becomes entitled to a serious ill health lump sum or dies.

36.New section 213H(7) defines “relevant assumptions” for determining opening and closing rights and provides a power to set those through regulations.

New section 213I Adjustment of closing rights

37.New section 213I(1) provides for adjusting closing rights under cash balance arrangements.

38.New section 213I(2) provides that the closing rights are to be increased by the amount of any pension debit during the tax year.

39.New section 213I(3) provides that the closing rights are to be reduced by the amount of any pension credit during the tax year.

40.New section 213I(4) provides that the closing rights are to be increased where there is a transfer of assets or rights out of the scheme to another registered pension scheme or qualifying recognised overseas pension scheme.

41.New section 213I(5) provides that the closing rights are to be reduced where there is a transfer of assets or rights from another pension scheme into the cash balance arrangement, by the amount of the transfer.

42.New section 213I(6) provides that the closing rights are to be increased where there is any surrender made, or similar action.

43.New section 213I(7) provides that the closing rights are to be increased where the individual becomes entitled to a pension or lump sum or there is an allocation of rights of the individual under the cash balance arrangement.

New section 213J Defined benefits arrangements

44.New section 213J(1) defines the pension savings amount for a defined benefits arrangement by reference to the increase in value of the pension and any lump sum. A defined benefits arrangement relating to a member is defined in section 152(6) and (7) of FA 2004. They are arrangements where the benefits provided are not money purchase benefits, but which are instead calculated by reference to any factor other than an amount available for the provision of benefits.

45.New section 213J(2) defines the pension increase by reference to the difference between the opening and closing pension multiplied by age-related factors.

46.New section 213J(3) defines the amount of the closing pension.

47.New section 213J(4) defines the amount of the opening pension.

48.New section 213J(5) defines the lump sum increase by reference to the difference between the opening and closing lump sums multiplied by age-related factors.

49.New section 213J(6) defines the amount of the closing lump sum.

50.New section 213J(7) defines the amount of the opening lump sum.

51.New section 213J(8) provides that the pension savings amount in connection with a defined benefits arrangement does not include minimum payments or amounts recovered under section 8 of PSA or section 4 of PSNIA.

52.New section 213J(9) provides for the pension savings amount to be treated as nil in a tax year where the individual becomes entitled to a serious ill-health lump sum or dies.

New section 213K Adjustment of closing pension and lump sum

53.New section 213K(1) provides for adjustment to be made to the value of the closing pension and lump sum when working out the pension savings amount under defined benefits arrangements.

54.New section 213K(2) provides for the closing pension and/or closing lump sum to be increased by the amount of any pension debit during the year.

55.New section 213K(3) provides for the amount of the closing pension and/or closing lump sum to be reduced by any pension credit deriving from a registered pension scheme.

56.New section 213K(4) provides that where there is a transfer of rights out of the scheme to another registered pension scheme or qualifying registered overseas pension scheme that leads to a reduction in pension or lump sum payable to the individual, then the closing pension and/or closing lump sum are to be increased by the amount of the transfer.

57.New section 213K(5) provides that where there is a transfer in of rights from another pension scheme that leads to an increase in pension or lump sum, then the amount of the increase is to be subtracted from the closing pension and/or closing lump sum.

58.New section 213K(6) provides that where an individual has exercised an option to commute, allocate or otherwise surrender any of their benefits then the closing pension and/or closing lump sum are to be increased by the amount of the reduction.

59.New section 213K(7) provides that where the individual becomes entitled to a pension or lump sum, the amount of the benefits drawn apart from by commutation of lump sum or of pension is to be added back to the closing pension or closing lump sum.

New section 213L Age-related factors

60.New section 213L(1) provides a power to set the age-related factors by regulations.

61.New section 213L(2) provides for there to be different types of age-related factors.

62.New section 213L(3) provides that the age-related factors to be used are those appropriate to the individual as set out in regulations.

63.New section 213L(4) provides that the age-related factors must be set by reference to the individual’s age at the end of the tax year and their relevant normal pension age.

64.New section 213L(5) and (6) provide for the time which the age-related factors should be set by reference to.

65.New section 213L(7) set out parameters for varying the age-related factors.

66.New section 213L(8) and (9) provide for the Treasury to take account of advice from the Government Actuary or their Deputy when setting the age-related factors.

67.New section 213L(10) sets the frequency of reviews of the age-related factors as occurring at intervals of no longer than five years.

68.New section 213L(11), (12) and (13) define normal pension age by reference to an individual being a deferred member of the scheme (or would be, where there is more than one arrangement, if the particular arrangement under consideration were the only arrangement under the scheme) and provide a power to modify it through regulations.

New section 213M Uprating of opening rights, pension and lump sum

69.New section 213M(1) and (2) provide for up-rating the amount of the opening rights under cash balance arrangements and the opening pension and lump sum under defined benefits arrangements.

70.New section 213M(3) and (4) provide a power for the amount to be used for up-rating to be set through regulations.

71.New section 213M(5) provides that where the amount to be used for up-rating is varied then a review of the age-related factors must be carried out.

New section 213N Hybrid arrangements

72.New section 213N(1) and (2) define the total pension savings amount in relation to hybrid arrangements. A hybrid arrangement is one under a registered pension scheme in which the ultimate form of benefits is uncertain. The ultimate form of those benefits may be either an exclusively defined benefit, an exclusively cash balance benefit, or an exclusively other money purchase benefit. Hybrid arrangements are defined in section 152(8) of FA 2004. The pension savings amount in respect of such an arrangement is the greater or greatest of the relevant amounts found by applying each of the provisions in new section 213N(3) to (5).

73.New section 213N(3) to (5) provide how to determine the pension savings amount in respect of a hybrid arrangement by applying to it whichever of the provisions in new sections 213G to 213J are appropriate.

New section 213O Anti-avoidance

74.New section 213O(1) introduces an anti-avoidance rule which applies if there is a high income excess relief charge scheme for the tax year.

75.New section 213O(2) to (5) defines a high income excess relief charge scheme by reference to there being a “scheme” to avoid the whole or part of the high income excess relief charge. The scheme has to involve the individual reducing their gross or relevant income or their total pension savings amount, but subject to such a reduction being redressed by an increase in their income or pension savings amount in a different tax year, or the provision of some other benefit at any other time. The rule also applies to connected persons.

76.New section 213O(6) provides that where the anti-avoidance rule applies, the scheme is to be ignored in determining the individual’s gross or relevant income or pension savings amount.

77.New section 213O(7) clarifies the scope of ‘scheme’ for this purpose.

78.New section 213O(8) defines connected person by reference to the definition in section 993 of ITA.

New section 213P Power to make regulations about charge

79.New section 213P provides a power to make regulations about the high income excess relief charge, including modifications to new sections 213A to 213O. Any regulations made under this section may not increase anyone’s liability to tax.

80.Paragraph 3 of the Schedule amends section 282 of FA 2004 to provide that the first regulations under new section 213L are to be laid under the affirmative resolution procedure.

81.Paragraph 4 of the Schedule amends Schedule 34 to FA 2004 by inserting a new paragraph 7B as set out below.

82.New paragraph 7B(1) and (2) provide regulation-making powers to the Commissioners for HM Revenue and Customs to modify the provisions of FA 2004, as they are amended by this Schedule, in relation to members of currently-relieved non-UK pension schemes.

83.Paragraph 5 of the Schedule provides that it shall have effect for the tax year 2011-12 and onwards.

Background Note

84.The Schedule restricts tax relief for pension contributions by or for the benefit of high income individuals. It follows a formal consultation which concluded on 3 March 2010. A consultation document “Implementing the restriction of pensions tax relief” was published on 9 December 2009 and a document summarising responses to the consultation “Implementing the restriction of pensions tax relief: a summary of consultation responses” was published on 24 March 2010.

85.This charge is on pension contributions for individuals whose gross income is £150,000 or more and whose relevant income is £130,000 or more. The charge will apply to all pension contributions to registered pension schemes (including deemed contributions to defined benefits or cash balance schemes), whether paid by or on behalf of those individuals or by their employer for their benefit. The charge restricts the level of tax relief to basic rate tax at 20 per cent. But, where the individual has gross income of £150,000 to £180,000 the amount of tax relief is tapered from their marginal rate of tax (up to 50 per cent) to 20 per cent. The charge will come into force with effect from 6 April 2011.

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