£150,000 Income Pension Trap
Originally sent: November 10, 2009Do you have clients who may trigger the tax penalties for high earners who wish to make pension contributions?
The “Anti-Forestalling Rules” are complex. They were originally laid out in a 52 page document on the HMRC site. This document is still there, but is now out of date due to changes enacted when the legislation passed through Parliament. For the most up to date information you should consult section 15 of the Registered Pension Schemes Manual.
I sent out an e-mail about this subject earlier in the year, but make no apology for sending this update on such an important topic.
In a nutshell, if your client will have taxable income this tax year of £150,000 or more, or had such an income in either of the two previous tax years, the anti-forestalling rules will apply. These rules can penalise a client for putting more money into his or her pension, and can even penalise a client for transferring a pension (depending on how contributions to that pension have been made).
If you have a client with income close to £150,000, is there any way that client can avoid the tax penalties whilst at the same time taking benefits from their company that mean “income” effectively exceeds this limit?
Many accountants seem to be advising their clients that there is no way of doing this. Certainly the Revenue have tried to close the immediately obvious loopholes.
One way is simply to take some of the benefits as an additional pension contribution. If the Revenue can argue there has been a salary sacrifice to achieve this the anti-forestalling rules will apply. However, if your client’s income has not reached £150,000 in previous years and the previous salary and bonus level has simply been maintained, then it is difficult to see how the Revenue could claim there has been a sacrifice this year. Watch out for any contractual agreements which could shoot your client in the foot, though. For example, if there is a bonus scheme which, if properly applied, would mean the £150,000 threshold were reached, then clearly there has been a salary sacrifice if your client takes a bonus just below this and then takes the rest as pension.
Another solution may be to take a salary sacrifice but then use it for something other than a pension. For example a company car, or even an interest-free loan. As long as the amount sacrificed is diverted in this way, and this keeps the client’s total taxable income below £150,000, the company may then make a large pension contribution on the client’s behalf and there will be no tax penalties arising from the anti-forestalling rules. This is because the salary sacrifice element of the rules specifically refers to salary sacrifice diverted into pension contributions rather than into any other benefit. The benefit obtained will itself, of course, be taxable, but the taxable value for the benefit-in-kind charge may be less than the real value to the client. For example, the interest free loan could give the client a substantial sum, which could then be repaid in a later year when the £150,000 threshold is no longer an issue.
As always, keep an open mind and stay creative when reviewing a client’s circumstances. Don’t be blinded by the headlights of Revenue announcements or accountants’ pessimistic pronouncements. There is often a way of achieving what the client wants to achieve if we only look carefully.
I hope you found this edition of our IFA Journal helpful. Keep an eye on your inbox for other tips and useful information.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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