2009 Budget Effect on High Earners

June 16th 2009

Who does it affect?
The definition of a high-income individual depends on income during the applicable tax year and the two preceding tax years. Thus, some individuals may currently have income below £150,000. In fact, they may even be basic rate tax payers and still qualify as a high-income individual. All taxable income must be taken into account, including earned income, dividends and salary sacrificed for pension contributions after 22 April 2009.

Pension payments may be used to reduce earned income but the maximum deduction is £20,000. This means that an individual could earn a gross salary of up to £169,999 before being classed as a high-income individual.

What is the result?
HMRC have introduced a new special annual allowance of £20,000. Payments which do not exceed this amount within one tax year are not affected.

Any pension payments made by high-income individuals, which exceed the special annual allowance and are not otherwise protected, will be subject to a special annual allowance charge which is intended to effectively limit tax relief on these payments to the basic rate.

How much is the charge?
The special annual allowance charge applies at a fixed rate of 20% on the excess payments. It does not adjust to provide net basic rate for each individual. If, for some reason, a high-income individual is not paying higher rate in the tax year that pension payments are made, the special annual allowance charge will still apply at 20% which would clearly be highly disadvantageous. This could apply if an individual's income has dropped in the current tax year, or if their pension payments only qualify for marginal rate tax.

In these circumstances, it will be even more important to monitor pension payments and consider other investment vehicles for savings above £20,000 per year.