________________________________________________
Pensions: High income excess relief charge
___________________________________________
Technical Guidance
This guidance is based on the High Income Excess Relief Charge legislation
published in the Finance Bill 2010 on 1 April 2010.
The guidance is in draft and may need to be amended to reflect any future
changes.
Guidance
1 April 2010
1
Introduction
The Government has introduced legislation in Finance Bill 2010 to restrict the tax
relief on contributions to Registered Pension Schemes with effect from 6 April 2011
for high income individuals. The restriction will apply to people with pension
savings and who have a gross income of £150,000 and over. Relief will be tapered
away so that for those earning £180,000 and over, it is worth 20 per cent, the same as
to a basic rate taxpayer.
This document contains draft technical guidance which explains the key elements of
the legislation and how the restriction will be applied. The draft guidance will be
incorporated into the technical pages of the Registered Pension Scheme Manual
(RPSM).
Comments on the draft guidance, which should be made by 7 June 2010, should be
addressed to:
Bill Haswell
HM Revenue and Customs
Pension Schemes Services
FitzRoy House
Castle Meadow Road
Nottingham
NG2 1BD
or e-mail [email protected]
2
Draft RPSM Guidance: High Income Excess Relief Charge
3
RPSM16100000 - Technical Pages: High income excess relief charge:
Contents
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High income excess relief charge: Contents
RPSM16100010
Overview
RPSM16101000
The income test
RPSM16102000
Pension savings amount
RPSM16103000
The appropriate rate
RPSM16104000
Anti-avoidance
RPSM16100010 - Technical Pages: High income excess relief charge:
Overview: Contents
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Overview: Contents
RPSM16100020
Introduction
RPSM16100030
Who does the high income excess relief charge apply to?
RPSM16100040
Calculating the charge
RPSM16100050
Total pension savings amount
RPSM16100060
The appropriate rate
RPSM16100020 - Technical Pages: High income excess relief charge:
Overview: Introduction
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Introduction
From 6 April 2011, tax relief on pension savings is restricted for those on incomes of
£150,000 and over and will be gradually tapered down so that for those on incomes of
£180,000 and over the tax relief is worth the same as it is for a basic rate taxpayer. This
means that individuals affected by the restriction will continue to receive at least basic rate
relief on all pension contributions (subject to the amount of the individual’s relevant UK
earnings, see RPSM05101120, and the existing annual and lifetime allowances).
Tax relief is restricted by a ‘high income excess relief charge’. Tax relief is given on
contributions in the normal way, e.g. through the net pay arrangement or relief at source.
The high income excess relief charge has the effect of reducing the rate of tax relief
given on pension savings to the basic rate of tax.
Core features
The core features of the high income excess relief charge are
•
An individual will be liable to the charge if their gross income is at least £150,000
(see RPSM16101300 for the meaning of gross income);
•
individuals with relevant income of less than £130,000 will not be liable to the
charge even though their gross income is at least £150,000 (see RPSM16101100
for the meaning of relevant income);
•
for individuals whose gross income is between £150,000 and £180,000 relief will be
reduced gradually until it is available only at basic rate for those with incomes of
£180,000 and over;
•
tax is charged on an individual’s ‘total pension savings amount’, which includes a
person’s own personal contributions, those made on their behalf, for example by an
employer, and the value of increased rights (see RPSM16100050 and
RPSM16102000 for more guidance on how to find the amount of pension savings)
•
payment of the high income excess relief charge is undertaken through the Self
Assessment system
•
unlike the special annual allowance there is no protected input amount; the tax
charge is made against all of an individual’s pension savings under registered
pension schemes.
RPSM16100030 – Technical pages: High income excess relief charge:
Overview: Who does the high income excess relief charge apply to?
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Who does the high income excess relief charge apply to?
[s213A & 213B]
The high income excess relief charge is a charge to income tax on individuals
•
with a high income, that is
−
gross income for the tax year of £150,000 or over, and
−
relevant income for the tax year of at least £130,000;
•
who are members of one or more registered pension schemes and
•
who have pension savings in a tax year (see RPSM16100050).
The individual is liable to the charge whether or not they and the scheme administrator
of the pension scheme or schemes concerned are UK resident, ordinarily UK resident or
domiciled in the UK.
The rate of the high income excess relief charge is the appropriate rate (see
RPSM16100060) in respect of the individual’s total pension savings amount (see
RPSM16100050).
RPSM16100040 – Technical Pages: High income excess relief charge:
Overview: Calculating the charge
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Calculating the charge
To calculate the high income excess relief charge take the following steps:
1.
Calculate the individual’s ‘relevant income’ (see RPSM16101100 on how to do this).
If the individual has relevant income of less than £130,000 you do not need to
proceed any further
2.
Calculate the individual’s ‘gross income’ (see RPSM16101300 on how to do this). If
the individual has gross income of less than £150,000 they are not liable to the
charge.
To calculate gross income you also need to calculate the individual’s total pension
savings amount (see RPSM16102000 on how to do this)
3.
Determine the ‘appropriate rate’ of the charge (RPSM16100060 and
RPSM16103000 give more information on the appropriate rate).
4.
Apply the appropriate rate to the total pension savings amount to calculate the
high income excess relief charge
RPSM16100050 - Technical Pages: High income excess relief charge:
Overview: Total pension savings amount
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Total pension savings amount
[s213F]
An individual’s total pension savings amount for a tax year is the total of the pension
savings amounts for each arrangement relating to the individual under a registered
pension scheme of which they are a member.
For guidance on calculating the pension savings amount for:
•
other money purchase arrangements see RPSM16102100
•
cash balance arrangements see RPSM16102300
•
defined benefits arrangements see RPSM16102400
•
hybrid arrangements see RPSM16102030
If an individual’s pension savings amount in respect of an arrangement would otherwise be
a negative amount the total pension savings amount for that arrangement is to be taken
as nil.
Where an individual’s total pension input amount for annual allowance purposes (see
RPSM06100040) exceeds the amount of the annual allowance for the tax year the
individual’s total pension savings amount is reduced by the amount of the excess.
For example, Bill has a total pension savings amount of £300,000. The annual allowance
for the tax year is £255,000, so Bill has pension savings of £45,000 more than the annual
allowance. This is deducted from Bill’s pension savings giving a total pensions saving
amount of £255,000 that is liable to the higher income excess relief charge.
RPSM16100060 - Technical pages: High income excess relief charge:
Overview: The appropriate rate
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The appropriate rate
[s213E]
The rate of the high income excess relief charge is the appropriate rate in respect of
the individual’s total pension savings amount.
‘The appropriate rate’ in relation to the total pension savings amount in the case of the
individual for a tax year is:
•
0% in relation to so much (if any) of that amount as, when added to the
individual’s reduced net income (see RPSM16103020) for the tax year, does not
exceed the basic rate limit
•
20% in relation to so much (if any) of that amount as, when so added, exceeds the
basic rate limit but does not exceed the higher rate limit
•
30% in relation to so much (if any) of that amount as, when so added, exceeds the
higher rate limit
RPSM16103060 explains what the basic rate limit and the higher rate limit is.
But where the individual’s gross income for the tax year is less than £180,000 the
percentages at bullet points 2 and 3 above are each reduced (but to no less than 0%) by 1
percentage point for every £1,000 by which it is less than £180,000.
Example
Fiona has income of £185,000 and made pension contributions of £160,000 to an
occupational pension scheme under the net pay arrangement. As a result her
‘reduced net income’ is £25,000. Fiona’s total pension saving amount is £160,000.
Suppose the higher rate limit is £150,000 and the basic rate limit is £40,000 (these
figures are hypothetical only). This means that of Fiona’s £160,000 total pension
saving amount the appropriate rate is
£35,000 @ 30%
£110,000 @ 20%
£15,000 @ 0%
Further guidance on the appropriate rate can be found at RPSM16103000.
RPSM16101000 - Technical Pages: High income excess relief charge: The
income test: Contents
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The Income test: Contents
RPSM16101010
Overview
RPSM16101100
Relevant income
RPSM16101300
Gross income
RPSM16101500
Examples
RPSM16101010 - Technical pages: High income excess relief charge: The
income test: Overview: Contents
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Overview: Contents
RPSM16101020
Overview of the income test
RPSM16101020 - Technical pages: High income excess relief charge: The
income test: Overview
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Overview of the income test
This looks at an individual’s income to determine whether or not they are affected by the
high income excess relief charge. An individual is affected by the charge if:
•
their ‘relevant income’ (broadly income after any deductions, except those for
pension contributions and charitable donations, plus any relevant salary sacrifice
amount) is £130,000 or over, and
•
their ‘gross income’ (broadly income after any deductions, except those for pension
contributions and charitable donations, plus the amount of pension savings less any
personal contributions) is £150,000 or more.
Guidance from RPSM16101100 tells you how to calculate ‘relevant income’.
To find out how to calculate ‘gross income’, see the guidance starting at RPSM16101300.
Examples on how to calculate both relevant income and gross income can be found from
RPSM16101500.
RPSM16101100 - Technical pages: High income excess relief charge: The
income test: Relevant income: Contents
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Relevant income: Contents
RPSM16101110
How to calculate relevant income
RPSM16101120
How to calculate relevant income – Step 1: total income
RPSM16101130
How to calculate relevant income – redundancy and other termination
payments
RPSM16101140
How to calculate relevant income – Step 2: donations and pension
contributions under net pay arrangement or corresponding relief
RPSM16101150
How to calculate relevant income – Step 3: certain losses and other
reliefs
RPSM16101160
How to calculate relevant income – Step 4 relevant salary sacrifice
arrangements and relevant flexible remuneration arrangements
RPSM16101170
How to calculate relevant income – Step 4: ‘relevant salary sacrifice
arrangements’
RPSM16101180
How to calculate relevant income – Step 4: ‘relevant flexible
remuneration arrangements’
RPSM16101190
Example of how to calculate relevant income
RPSM16101110 - Technical pages: High income excess relief charge: The
income test: How to calculate relevant income
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How to calculate relevant income
[s213D]
An individual’s ‘relevant income’ for a tax year is calculated by taking the following steps:
Step 1
Identify their total income for the tax year (see RPSM16101120).
Step 2
Add any pension contributions and charitable donations deducted before PAYE tax is
calculated (see RPSM16101140).
Step 3
Deduct any income tax deductions, other than directly claimable pension contributions and
gifts of qualifying investments to charity, to which the individual was entitled to tax relief
for the tax year concerned (see RPSM16101150).
Step 4
Add any 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 (see
RPSM16101160).
Relevant income less than £130,000
An individual whose relevant income is less than £130,000 cannot be liable to the high
income excess relief charge. There is no need to calculate the individual’s ‘gross
income’ or identify their total pension savings amount.
Relevant income £130,000 or more
An individual may be liable to the high income excess relief charge if their relevant income
for the year is £130,000 or more. If their relevant income is at least £130,000 an
individual needs to find out what their ‘gross income’ is to see whether or not they are
affected by the restriction. To calculate an individual’s gross income you need to identify
their total pension savings amount.
Guidance from RPSM16101300 tells you how to calculate ‘gross income’ and further
information on finding the total pension savings amount can be found from
RPSM16102000.
RPSM16101120 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income – Step 1:
total income
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How to calculate relevant income– Step 1: total income
[s213D]
For the purposes of calculating an individual’s relevant income to determine if they are
affected by the high income excess relief charge take the total amounts of their income
that are within the charge to income tax for the tax year. This is the amount of income
that is the figure at the first stage of section 23 Income Tax Act 2007.
This figure of total income includes:
•
earnings from employment
•
earnings from self-employment/partnerships
•
most pensions income (State, occupational, and personal pensions)
•
interest on most savings
•
income from shares (dividend income)
•
rental income, and
•
income received by an individual from a trust, and
•
redundancy and other termination payments except for the first £30,000 that is not
taxable (see RPSM16101130).
It does not, however, include any amounts giving rise to income tax liabilities which are
not treated as income for general tax purposes in connection with:
•
the recovery of excessive relief where the individual’s Self Assessment for the tax
year is final (for example, the withdrawal or reduction of Enterprise Investment
Scheme relief or excess credit for overseas tax)
•
deduction of tax at source where the liability is not in respect of the individual’s
own liability and
•
stand-alone tax charges (for example, tax charges in respect of an unauthorised
payment from a registered pension scheme).
The full list of amounts not included in the amount of ‘total income’ is in sections 30 and
32 Income Tax Act 2007.
This step is the starting point for calculating an individual’s liability to income tax under
Self Assessment. If you have any questions about what is included at this stage you
should consult the individual’s accountant or tax adviser in the first instance. If the
adviser is unable to answer your question contact the HMRC office that deals with the
individual’s personal tax affairs, not Pension Schemes Services.
RPSM16101130 – Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income –
redundancy and other termination payments
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How to calculate relevant income – redundancy and other termination payments
Individuals who have received a redundancy payment, or other form of termination
payment, need to take this into account when working out their relevant income for the
purposes of the high income excess relief charge.
For the purposes of determining an individual’s relevant income for the tax year in which
the redundancy payment, or other termination payments, is received, the first £30,000 of
any such payments is normally exempt from income tax and does not need to be included
in the income calculation. The remainder will count towards the individual’s relevant
income.
RPSM16101140 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income – Step 2:
donations and pension contributions
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How to calculate relevant income – Step 2: donations and pension contributions
under net pay arrangement or corresponding relief
[s213D]
Having determined at step 1 (RPSM16101120) the individual’s total income add to the
amount any:
•
donations to charity under the payroll deduction scheme (Part 12 of ITEPA 2003),
and
•
pension contributions under
−
the net pay arrangement (section 193(2) FA 2004 - see RSPM05101310), or
−
the corresponding relief provisions in accordance with paragraph 51,
Schedule 36, FA 2004 (see RPSM13101100)
made during the tax year.
The net pay arrangement operates where the employer deducts contributions within an
occupational pension scheme or, where appropriate, public service pension scheme
from the individual’s employment income before deducting any tax from that income under
the PAYE payroll procedures.
For the purposes of calculating an individual’s relevant income, their income for the tax
year includes amounts before deductions are made under the net pay arrangement.
Therefore, such contributions should be added to the total income to see whether or not
the £130,000 relevant income threshold is reached.
Member contributions to registered pension schemes which obtain tax relief by a
method other than under the net pay arrangement (such as relief at source arrangements
or making a claim under the individual’s Self Assessment tax return) are made from taxed
income and so are already included in the individual’s total income at step 1. Therefore,
no adding back for such amounts is needed here, but see step 3 (RPSM16101150).
RPSM16101150 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income – Step 3:
certain losses and other reliefs
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How to calculate relevant income – Step 3: certain losses and other reliefs
[s213D]
Deduct from the adjusted total income figure found after step 2 (see RPSM16101140) any
amounts in respect of which the individual was entitled to tax relief for the tax year which
arise under the list in section 24 of the Income Tax Act 2007 except for
•
Chapter 3 part 8 Income Tax Act (tax relief on gifts of shares, securities and real
property to charities),
•
Section 193(4) & 194(1) FA2004 (tax relief given on pension contributions)
This means you do not make any deduction for pension contributions or gifts of shares
and/or real property to charities at this step.
The deductible items are mainly concerned with deductions for trade and property losses,
but include other items.
The list includes (all references are to the Income Tax Act 2007):
•
trade loss relief against general income (section 64)
•
carry-forward trade loss relief (section 83)
•
terminal trade loss relief (section 89)
•
post-cessation trade relief (section 96)
•
carry-forward property loss relief (section 118)
•
property loss relief against general income (section 120)
•
post cessation property relief (section 125)
•
employment loss relief against general income (section 128)
•
share loss relief (Chapter 6 of Part 4)
•
loss relief against miscellaneous income (section 152)
Some types of loss relief can be deducted only from the kind of income that gave rise to
the loss, and the amount the individual is entitled to for the year is therefore limited to the
amount of that kind of income. For example, the individual has carry-forward trade losses
of £5,000 for 2011/12 but their trading income for that year is £3,000. The individual is
therefore entitled to deduct carry-forward trade loss relief of only £3,000, so the net
trading income for 2011/12 is £nil, for the purposes of this step. If the individual has other
taxable income, this will be unaffected by the balance of loss relief.
If you have any questions about what deductions can be made at this stage you should
consult the individual’s accountant or tax adviser in the first instance. If the adviser is
unable to answer your question you should contact the tax office that deals with the
individual’s personal tax affairs not Pension Schemes Services.
RPSM16101160 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income - Step 4:
relevant salary sacrifice arrangements and relevant flexible
remuneration arrangements
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How to calculate relevant income: Step 4: relevant salary sacrifice arrangements
and relevant flexible remuneration arrangements
[s213D]
To the amount found after step 3 (see RPSM16101150) add the amount by which the
individual’s general earnings or specific employment income for the tax year has been
reduced by a ‘relevant salary sacrifice arrangement’ or ‘relevant flexible remuneration
arrangement’.
For a definition of a ‘relevant salary sacrifice arrangement’ see RPSM161011170 and for a
definition of a ‘relevant flexible remuneration arrangement’ see RPSM16101180.
RPSM16101170 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income - Step 4:
‘relevant salary sacrifice arrangements’
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How to calculate relevant income - Step 4: ’relevant salary sacrifice
arrangements’
[s213D]
A ‘relevant salary sacrifice arrangement’ is an arrangement under which an individual gives
up the right to receive general earnings or specific employment income in return for the
making of relevant pension provision and which is made on or after 22 April 2009, whether
before or after the employment in question began.
For the purposes of this step ‘relevant pension provision’ means:
the payment of contributions (or additional contributions) to a pension scheme in
respect of the individual or otherwise (by an employer of the individual or any
other person) to secure an increase in the amount of benefits to which the
individual or any person who is a dependent of, or is connected with, the individual
is actually or prospectively entitled to under the scheme.
The meaning of ‘connected person’ is defined by section 993 Income Tax Act 2007.
Broadly, this includes a spouse, civil partner or relative.
Example
John is an employee of a company and is contractually entitled to a salary of
£160,000 each year. On 23 April 2009 John agrees with his employer to give up
his contractual right to £40,000 of his salary in return for the employer making a
£40,000 employer’s contribution to a registered pension scheme for John’s
benefit.
As John has given up his contractual right to receive £40,000 of his employment
income the effect of this arrangement has been to reduce his salary to £120,000 a
year.
However because the salary sacrifice agreement was made after 22 April 2009 it is
a ‘relevant salary sacrifice arrangement’ and is so added into the calculation of
relevant income. John’s relevant income is therefore £160,000.
RPSM16101180 - Technical Pages: High income excess relief charge: The
income test: Relevant income: How to calculate relevant income - Step 4:
‘relevant flexible remuneration arrangements’
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How to calculate relevant income - Step 4: ‘relevant flexible remuneration
arrangements’
[s213D]
A ‘relevant flexible remuneration arrangement’ is an arrangement under which the
individual and an employer of the individual agree that relevant pension provision is to be
made rather than the individual receive some description of employment income and which
is made on or after 22 April 2009, whether before or after the employment in question
began.
For the purposes of this step ’relevant pension provision’ means:
The payment of contributions (or additional contributions) to a pension scheme in
respect of the individual or otherwise (by an employer of the individual or any
other person) to secure an increase in the amount of benefits to which the
individual or any person who is a dependent of, or is connected with, the individual
is actually or prospectively entitled to under the scheme.
The meaning of ‘connected person’ is defined by section 993 Income Tax Act 2007.
Example
Jean is offered and accepts a new job on 5 August 2009. Her new employer agrees
that her income and benefits package will be £155,000 a year. Jean decides to
take this in the form of a salary of £125,000 and an employer contribution into her
registered pension scheme of £30,000.
By entering into this arrangement Jean has effectively reduced her employment
income by £30,000 to £125,000.
However because the flexible remuneration arrangement was entered into after 22
April 2009 it is a ‘relevant flexible remuneration arrangement’ and is so added into
the calculation of Jean’s relevant income. Her relevant income is, therefore,
£155,000.
RPSM16101190 - Technical Pages: High income excess relief charge: The
income test: Relevant income: Example of how to calculate relevant
income
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Example of how to calculate relevant income
Step 1
Catherine’s taxable employment income for the 2011-12 tax year is £111,000 and she has
other taxable income of £7,000 from dividends on shares and interest on her savings.
Catherine’s total taxable income for the year is £118,000 (£111,000 + £7,000)
Step 2
Catherine contributes £450 per month to her money purchase occupational pension
scheme using the net pay arrangement. She also donates £50 per month to charity
through a payroll deduction.
These total £500 per month or £6,000 for the year
This amount is added to the ‘Step 1’ figure, giving an amount of £124,000 (£118,000 +
£6,000)
Step 3
Catherine did not have any qualifying losses or other reliefs
The amount found after this step, therefore, is still £124,000
Step 4
At the beginning of the 2011-12 tax year, Catherine agreed with her employer to give up
£12,000 of her income in return for her employer making a contribution to her pension
scheme of £12,000.
As this arrangement was made after 22 April 2009 this is a ‘relevant salary sacrifice’ this
amount is added to the ‘Step 3’ figure, giving a total of £136,000 (£124,000 + £12,000)
Catherine’s relevant income for 2011-12 is therefore £136,000. As this is above the
£130,000 relevant income threshold, she therefore needs to calculate her gross income
(see RPSM16101300) to determine whether or not she is subject to the high income
excess relief charge.
RPSM16101300 - Technical Pages: High income excess relief charge: The
income test: Gross income: Contents
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Gross income: Contents
RPSM16101310
How to calculate gross income
RPSM16101320
How to calculate gross income – Step 1: total income
RPSM16101330
How to calculate gross income – redundancy and other termination
payments
RPSM16101340
How to calculate gross income - Step 2: donations and pension
contributions under net pay arrangement or corresponding relief
RPSM16101350
How to calculate gross income – Step 3: certain losses and other relief
RPSM16101360
How to calculate gross income – Step 4: Total pension savings amount
RPSM16101370
Example of how to calculate gross income
RPSM16101310 - Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income
-------------------------------------------------------------------------------------------------------------------
How to calculate gross income
[s213C]
Where an individual’s relevant income (see RPSM16101100) is at least £130,000 it is
necessary to calculate their ‘gross income’ to see if they are liable to the high income
excess relief charge.
An individual’s gross income for a tax year is calculated by taking the following steps.
Step 1
Identify their total income for the tax year (see RPSM16101320).
Step 2
Add any pension contributions and donations deducted from employment income under
the net pay process(see RPSM16101340).
Step 3
Deduct any income tax deductions, other than directly claimable pension contributions and
gifts of qualifying investments to charity, to which the individual was entitled to tax relief
for the tax year concerned (see RPSM16101350).
Step 4
Add the individual’s total pension savings amount (less any personal contributions) for
the tax year (see RPSM16101360).
Gross income less than £150,000
An individual whose gross income is less than £150,000 cannot be liable to the high
income excess relief charge.
Relevant income £150,000 or more
The individual is liable to the high income excess relief charge on their total pension
savings amount. Unlike the special annual allowance there is no protected amount; all
pension savings amounts are liable to the high income excess relief charge.
RPSM16101320 - Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income – Step 1: total
income
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How to calculate gross income – Step 1: total income
[s213C]
For the purposes of calculating an individual’s gross income to determine whether or not
they are affected by the restriction of tax relief on pension contributions take the total
amounts of their income that are within the charge to income tax for the tax year. This is
the amount of income that is the figure at the first stage of section 23 Income Tax Act
2007.
This figure of total income includes:
•
earnings from employment
•
earnings from self-employment/partnerships
•
most pensions income (State, occupational, and personal pensions)
•
interest on most savings
•
income from shares (dividend income)
•
rental income, and
•
income received by an individual from a trust, and
•
redundancy and other termination payments except for the first £30,000 that is not
taxable (see RPSM16101330).
It does not, however, include any amounts giving rise to income tax liabilities which are
not treated as income for general tax purposes in connection with:
•
the recovery of excessive relief where the individual’s self-assessment for the tax
year is final (for example, the withdrawal or reduction of Enterprise Investment
Scheme relief or excess credit for overseas tax)
•
deduction of tax at source where the liability is not in respect of the individual’s
own liability and
•
stand-alone tax charges (for example, tax charges in respect of an unauthorised
payment from a registered pension scheme).
The full list of amounts not included in the amount of “total income” is in sections 30 and
32 Income Tax Act 2007.
This step is the starting point for calculating the individual’s liability to income tax under
Self Assessment. If you have any questions about what is included at this stage you
should consult the individual’s accountant or tax adviser in the first instance. If they are
unable to answer your question you should contact the tax office that deals with the
individual’s personal tax affairs not Pension Schemes Services.
RPSM16101130 – Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income – redundancy
and other termination payments
-------------------------------------------------------------------------------------------------------------------
How to calculate gross income – redundancy and other termination payments
Individuals who have received a redundancy payment, or other form of termination
payment, need to take this into account when working out their gross income for the
purposes of the high income excess relief charge.
For the purposes of determining an individual’s gross income for the tax year in which the
redundancy payment, or other termination payments, are received the first £30,000 of any
such payments is normally exempt from income tax. The remainder will count towards the
individual’s gross income.
RPSM16101340 - Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income – Step 2:
donations and pension contributions
-------------------------------------------------------------------------------------------------------------------
How to calculate gross income – Step 2: donations and pension contributions
under net pay arrangement or corresponding relief
[s213C]
Having determined the individual’s total income at step 1 (see RPSM16101320) add to the
amount any:
•
donations to charity under the payroll deduction scheme (Part 12 of ITEPA 2003),
and
•
pension contributions under
−
the net pay arrangement (section 193(2) FA 2004 – see RPSM05101310), or
−
under the corresponding relief provisions in accordance with paragraph 51,
Schedule 36, FA 2004 (see RPSM13101100)
made during the tax year.
The net pay arrangement operates where the employer deducts contributions from the
employment income before deducting any tax from that income under the PAYE payroll
procedures within an occupational pension scheme or, where appropriate, public
service pension scheme.
For the purposes of calculating an individual’s relevant income their income for the tax
year includes amounts before deductions are made under the net pay arrangement.
Therefore, such contributions should be added to the total income to see whether or not
the £150,000 gross income threshold is reached.
Member contributions to registered pension schemes which obtain tax relief by a
method other than under the net pay arrangement (such as relief at source arrangements
or making a claim under the individual’s Self Assessment tax return) are made from taxed
income and so are already included in the individual’s total income at step 1. Therefore,
no adding back of such amendment is needed.
RPSM16101350 - Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income – Step 3:
certain losses and other reliefs
-------------------------------------------------------------------------------------------------------------------
How to calculate gross income – Step 3: certain losses and other reliefs
[s213C]
Deduct from the adjusted total income figure found after step 2 (see RPSM16101340) any
amounts upon which the individual was entitled to tax relief for the tax year which arise
under the list in section 24 of Income Tax Act 2007 except for
•
Chapter 3 part 8 Income Tax Act 2007 (tax relief on gifts of shares, securities and
real property to charities),
•
Section 193(4) & 194(1) FA2004 (tax relief given on pension contributions)and
This means you do not make any deduction for pension contributions or gifts of shares
and/or real property to charities at this step.
The deductible items are mainly concerned with deductions for trade and property losses,
but include other items. The list includes (all references are to Income Tax Act 2007):
•
trade loss relief against general income (section 64)
•
carry-forward trade loss relief (section 83)
•
terminal trade loss relief (section 89)
•
post-cessation trade relief (section 96)
•
carry-forward property loss relief (section 118)
•
property loss relief against general income (section 120)
•
post cessation property relief (section 125)
•
employment loss relief against general income (section 128)
•
share loss relief (Chapter 6 of Part 4)
•
loss relief against miscellaneous income (section 152)
Some types of loss relief can be deducted only from the kind of income that gave rise to
the loss, and the amount the individual is entitled to for the year is therefore limited to the
amount of that kind of income. For example, the individual has carry-forward trade losses
of £5,000 for 2011/12 but their trading income for that year is £3,000. The individual is
therefore entitled to carry-forward trade loss relief of only £3,000, so the net trading
income for 2011/12 is £nil for the purposes of this step. If the individual has other taxable
income, this will be unaffected by the balance of loss relief.
If you have any questions about what deductions can be made at this stage you should
consult the individual’s accountant or tax adviser in the first instance. If the adviser is
unable to answer your question you should contact the tax office that deals with the
individual’s personal tax affairs not Pension Schemes Services.
RPSM16101360 - Technical Pages: High income excess relief charge: The
income test: Gross income: How to calculate gross income - Step 4: Total
pension savings amount
-------------------------------------------------------------------------------------------------------------------
The income test: How to calculate gross income – Step 4: Total pension savings
amount
[s213C & 213F]
To the amount found after step 3 (see RPSM16101350) add the total pension savings
amount for a tax year for each arrangement relating to the individual under a
registered pension scheme of which they are a member as remains after deducting
from it the amount of relievable pension contributions paid by or on behalf of the
individual during the tax year.
For guidance on calculating the pension savings amount for:
•
other money purchase arrangements see RPSM16102100
•
cash balance arrangements see RPSM16102300
•
defined benefits arrangements see RPSM16102400
•
hybrid arrangements see RPSM16102030
If an individual’s pension savings amount in respect of an arrangement would otherwise be
a negative amount the total pension savings amount for that arrangement is to be taken
as nil.
Where an individual’s total pension input amount for annual allowance purposes
exceeds the amount of the annual allowance for the tax year the individual’s total
pension savings amount is reduced by the amount of the excess pension input amount for
annual allowance purposes
For example, Bill has income of £350,000 and a pension savings amount of £300,000.
The annual allowance for the tax year is £255,000, so Bill has pension savings of £45,000
over the annual allowance. This is deducted from Bill’s pension savings giving a total
pensions saving amount of £255,000 that is liable to the high income excess relief
charge.
RPSM16101370 - Technical Pages: High income excess relief charge: The
income test: Gross income: Example of how to calculate gross income
-------------------------------------------------------------------------------------------------------------------
Example of how to calculate gross income
Step 1
Paul has taxable employment income for the 2011-12 tax year of £85,000 after deduction
of pension contributions under net pay arrangements. He also has taxable trading income
of £53,000 from a small business that he runs and a further £2,000 interest on his
savings. He has no other taxable income.
Paul’s total taxable income for the year is £140,000 (£85,000 + £53,000 + £2,000)
Step 2
Paul contributes £250 per month to a defined benefits pension scheme using the net pay
arrangement. These contributions total £3,000 for the year
This amount is added to the ‘Step 1’ figure, giving an amount of £143,000 (£140,000 +
£3,000).
Step 3
Paul has qualifying trading losses of £5,000 for 2010-11 from his business.
This amount is carried forward and deducted from his self-employed income for 2011-12
the ‘Step 2’ figure, giving an amount of £138,000 (£143,000 - £5,000)
Step 4
Paul’s total pension savings amount from his defined benefits pension scheme for
2011-12 is £13,000. However because he has contributed £3,000 to the scheme, this is
deducted from the pension saving amount, to give a deemed employer contribution of
£10,000 (£13,000 - £3,000).
This amount is added to the ‘Step 3’ figure, giving an amount of £148,000 (£138,000 +
£10,000)
Paul’s gross income for 2011-12 is therefore £148,000. As this is less than the gross
income threshold of £150,000, Paul is not subject to the high income excess relief
charge for 2011-12.
RPSM16101500 - Technical Pages: High income excess relief charge: The
income test: Examples: Contents
-------------------------------------------------------------------------------------------------------------------
Examples: Contents
RPSM16101510
Relevant income below £130,000
RPSM16101520
Relevant income above £130,000 but gross income is below £150,000
RPSM16101530
Relevant income above £130,000 and gross income above £150,000
RPSM16101540
Relevant income above £130,000 and gross income above £150,000
(salary sacrifice)
RPSM16101550
Relevant income above £130,000 and gross income above £150,000
(flexible remuneration)
RPSM16101510 - Technical Pages: High income excess relief charge: The
income test: Examples – relevant income below £130,000
-------------------------------------------------------------------------------------------------------------------
Examples – relevant income below £130,000
Sandra has a salary of £115,000 and no other source of income.
Sandra’s employer pays a contribution of £40,000 in respect of Sandra to its money
purchase occupational pension scheme. This contribution is not made under a salary
sacrifice or flexible remuneration arrangement and the contribution is Sandra’s only
pension savings for the tax year.
Sandra does not make any charitable donations.
Sandra’s total income for the tax year is £115,000 and her employer’s contribution
£40,000 is not added to Sandra’s total income figure for the purpose of establishing her
relevant income for the tax year.
Sandra’s relevant income for the tax year is £115,000 (the same as her total income of
£115,000).
There is no need for Sandra to calculate her gross income because her relevant income of
£115,000 is below the threshold of £130,000.
Sandra is not liable to the high income excess relief charge in respect of her pension
savings for the tax year of £40,000.
RPSM16101520 - Technical Pages: High income excess relief charge: The
income test: Examples – relevant income above £130,000 but gross
income below £150,000
-------------------------------------------------------------------------------------------------------------------
Examples – relevant income above £130,000 but gross income below £150,000
David has employment income of £135,000 and no other source of income. He makes a
contribution of £30,000 to his personal pension scheme and his employer makes a
pension contribution of £10,000 for his benefit. The employer contribution is not made
under a salary sacrifice or flexible remuneration arrangement.
The total contribution of £40,000 is David’s only pension savings for the tax year.
David does not make any charitable donations.
David’s relevant income for the tax year is £135,000, which is the same as his total
income for the year. The pension contribution of £30,000 David made to his pension
scheme is taken into account automatically when calculating his relevant income as the
contribution was not made under the net pay arrangement but from his taxed income and
is already included in his total income for the year.
Because David’s relevant income is £135,000 and above the threshold of £130,000 he will
need to calculate his gross income for the tax year to determine whether or not he is liable
to the high income excess relief charge for that year.
David’s gross income is his total income for the tax year, plus the amount representing his
total pension savings amount for the tax year after a deduction has been made for any
relievable pension contributions paid by, or on behalf of, David during the tax year.
His total pension savings amount is £40,000, made up of the £10,000 employer
contribution and David’s £30,000 personal contribution. But a deduction is made in
respect of the contribution of £30,000 that David made to his pension scheme as this is a
relievable pension contribution and the remaining amount of £10,000 is then added to the
amount of his total income.
David’s total gross income is therefore £145,000 (his total income for the year of £135,000
plus £10,000, being the amount remaining from his total pension savings amount after
deducting relievable pension contributions).
David’s gross income is below the gross income threshold of £150,000. Therefore David is
not liable to a high income excess relief charge in respect of his pension savings for the tax
year of £40,000.
RPSM16101530 - Technical Pages: High income excess relief charge: The
income test: Examples – relevant income above £130,000 and gross
income above £150,000
-------------------------------------------------------------------------------------------------------------------
Examples – relevant income above £130,000 and gross income above £150,000
Evan has a salary of £160,000 and no other source of income. He is a member of a
money purchase occupational pension scheme. Employee contributions are 5% of
salary and employer contributions are 10% of salary. Evan’s contribution to the scheme
is, therefore, £8,000 which is paid under the net pay arrangement (see RPSM05101310)
and his employer pays £16,000. The employer contribution is not made under a salary
sacrifice or flexible remuneration arrangement.
The total contribution of £24,000 is Evan’s only pension savings for the tax year.
Evan does not make any charitable donations.
Evan’s total income for the year is £152,000 (that is his salary of £160,000 minus his
£8,000 pension contribution paid under the net pay arrangement). His relevant income is,
however, £160,000 (£152,000 plus £8,000) because his contribution made under the net
pay arrangement is added to his total income figure - see RPSM16101140.
Evan’s relevant income of £160,000 for the tax year is above the threshold of £130,000.
This means that Evan needs to calculate his gross income for the tax year to determine
whether or not he is liable to the high income excess relief charge for that year.
Evan’s gross income is calculated by taking his total income for the year and adding to that
amount the contributions he made in the year under the net pay arrangement and the
amount that is left from his total pension savings amount for the year after deduction for
any relievable pension contributions paid by or on behalf of Evan during the tax year.
Evan’s total pension savings amount for the tax year is £24,000 (being his
contributions of £8,000 plus his employer’s £16,000). But a deduction is made in respect
of the contribution of £8,000 that Evan made to his pension scheme as this is a relievable
pension contribution and the remaining amount of £16,000 (i.e. the employer’s
contribution of £16,000) is then added to the amount of his total income.
Evan’s gross income for the year is £176,000 (being Evan’s total income of £152,000 plus
his contribution of £8,000 plus the employer’s contribution of £16,000). .
Evan is liable to the high income excess relief charge on the total amount of pension
contributions paid of £24,000 as his gross income for the tax year is above the threshold
of £150,000. Because Evan’s gross income is below £180,000 the taper will apply.
RPSM16101540 - Technical Pages: High income excess relief charge: The
income test: Examples – relevant income above £130,000 and gross
income above £150,000 (salary sacrifice)
-------------------------------------------------------------------------------------------------------------------
Examples – relevant income above £130,000 and gross income above £150,000
(salary sacrifice)
Jack has a salary of £125,000 and no other sources of income. He is a member of a noncontributory defined benefits pension scheme. Jack’s pension savings amount for the
tax year under this scheme is £40,000. Jack also makes a salary sacrifice of £15,000 in
return for his employer making an additional pension contribution of £15,000 on his
behalf, which is a relevant salary sacrifice arrangement. The £15,000 contribution is paid
in respect of Jack to an other money purchase arrangement.
The pension savings amount of £40,000 and the employer contribution of £15,000 under
the salary sacrifice arrangement is Jack’s only pension savings for the tax year.
Jack does not make any charitable donations.
Jack’s relevant income for the tax year is his total income of £125,000 plus the amount of
his salary that he has sacrificed in return for the employer contribution to his pension
scheme. This amount is £15,000 which means Jack’s relevant income for the tax year is
£140,000 (being £125,000 plus £15,000). This is above the relevant income threshold of
£130,000, which means that Jack needs to determine his gross income for the tax year to
see if he is liable to a high income excess relief charge in respect of his pension
savings for that year.
Jack’s gross income for the tax year is calculated by taking his total income for the year
and adding to that amount the amount that is left from his total pension savings amount
for the year after deduction for any relievable pension contributions paid by or on
behalf of Jack during the tax year.
Jack’s total pension savings amount for the tax year is £55,000 (being Jack’s pension
savings amount under the defined benefits scheme of £40,000 plus his employer’s
contribution of £15,000 to the other money purchase arrangement). A deduction is not
made from Jack’s total pension savings amount because Jack has not made any relievable
pension contributions during the year and no such contributions have been paid on behalf
of Jack either (the employer contribution of £15,000 under the salary sacrifice
arrangement is not a relievable pension contribution).
Jack’s total income for the tax year is £125,000 and his total pension savings amount for
the year is added to that amount. Jack’s gross income for the year is therefore £180,000
(being his total income of £125,000 plus his total pension savings amount of £55,000).
Because Jack’s gross income is above the threshold of £150,000 he is liable to the high
income excess relief charge at the appropriate rate as normal. The taper does not apply
because Jack’s gross income is not less than £180,000.
RPSM16101550 - Technical Pages: High income excess relief charge: The
income test: Examples – relevant income above £130,000 and gross
income above £150,000 (flexible remuneration)
-------------------------------------------------------------------------------------------------------------------
Examples – relevant income above £130,000 and gross income above £150,000
(flexible remuneration)
Liz agrees a remuneration package worth £180,000 with her new employer. Her employer
offers her a flexible remuneration package which involves taking part as salary and part in
non-cash benefits. Liz agrees a remuneration package with a salary of £145,000,
employer pension contributions of £30,000 and taxable benefits of £5,000. In addition, Liz
has income from a rental property of £20,000. Liz also makes a charitable contribution of
£5,000 through the payroll giving scheme.
Liz’s total income for the year is £165,000, (that is salary £145,000 plus taxable benefits
£5,000, plus the £20,000 rental income, minus the charitable donation of £5,000) see
RPSM16101140.
Liz’s relevant income for the year is, however, £165,000 plus £5,000 (the amount of the
charitable donation made through the payroll giving scheme) plus £30,000 (the amount of
salary given up by her under the flexible remuneration package). Her total relevant
income for the year is therefore £200,000.
Liz’s income for testing against the relevant income threshold of £130,000 is £200,000,
which is also above the gross income threshold of £150,000.
Liz’s gross income for the purpose of the high income excess relief charge is £200,000.
Liz is, therefore, liable to the high income excess relief charge at the appropriate rate.
RPSM16102000 – Technical Pages: High income excess relief charge:
Pension savings amount
-------------------------------------------------------------------------------------------------------------------
Pension savings amount: Contents
RPSM16102010
Overview
RPSM16102100
Other money purchase arrangements
RPSM16102300
Cash balance arrangements
RPSM16102400
Defined benefits arrangements - overview
RPSM16102500
Defined benefits pensions
RPSM16102600
Defined benefits lump sums
RPSM16102800
Age-related factors
RPSM16102010 – Technical Pages: High income excess relief charge:
Pension savings amount: Overview: Contents
-------------------------------------------------------------------------------------------------------------------
Overview: contents
RPSM16102020
Overview
RPSM16102030
Hybrid arrangements
RPSM16102020 - Technical Pages: High income excess relief charge:
Pension savings amount: Overview
-------------------------------------------------------------------------------------------------------------------
Overview
[s213F]
One of the elements used to determine the application and amount of any high income
excess relief charge (see RPSM16100040) is the total pension savings amount (see
RPSM16100050).
A person may have rights under any number of arrangements, under any number of
pension schemes. The total pension savings amount, for any tax-year, is the total of all
the individual pension savings amounts that build up for a person in that year. These
individual amounts are measured at arrangement level, using a method that depends on
the nature of the particular arrangement:
•
For hybrid arrangements, see RPSM16102030
•
For other money purchase arrangements, see RPSM1610200
•
For cash balance arrangements, see RPSM16102300
•
For defined benefits arrangements see RPSM16102400
If using the above method ever results in a negative pension savings amount, then the
figure for that arrangement is instead taken to be nil.
RPSM16102030 - Technical Pages: High income excess relief charge:
Pension savings amount: Hybrid arrangements
-------------------------------------------------------------------------------------------------------------------
Hybrid arrangements
[s213N]
The pension savings amount for a hybrid arrangement (RPSM09100260) is the
greatest of three hypothetical figures: A, B and C below.
•
A is what would be the pension savings amount if the arrangement were
ultimately providing benefits as an other money purchase arrangement (see
RPSM16102100).
•
B is what would be the pension savings amount if the arrangement were
ultimately providing benefits as a cash balance arrangement (see
RPSM16102300).
•
C is what would be the pension savings amount if the arrangement were
ultimately providing benefits as a defined benefits arrangement (see
RPSM16102400).
If the design of the particular hybrid arrangement is such that it is not capable of providing
one of the above types of benefit, then that particular paragraph is to be disregarded for
the measure; meaning you should only compare the two remaining types that the
arrangement is actually capable of providing.
RPSM16102100 – Technical Pages: High income excess relief charge:
Pension savings amount: Other money purchase arrangements: Contents
-------------------------------------------------------------------------------------------------------------------
Other money purchase schemes: Contents
RPSM16102110
Other money purchase arrangements
RPSM16102110 - Technical Pages: High income excess relief charge:
Pension savings amount: Other money purchase arrangements
-------------------------------------------------------------------------------------------------------------------
Other money purchase arrangements
[s213G]
The way in which you work out the amount of the pension savings amount in respect of
any other money purchase arrangement depends on circumstances as follows:
•
If during the tax-year, the individual:
•
becomes entitled to a serious ill-health lump sum (see
RPSM09104610) under the arrangement or
•
they die,
the pension savings amount (in respect of that arrangement) for that year will be
nil.
•
If the circumstances do not match those above, then the pension savings amount
is the total of the:
•
member contributions - that is any relievable pension contributions paid
by (or on behalf of) an individual under the arrangement, and
•
employer contributions - meaning any contributions paid in respect of an
individual under the arrangement by their employer*,
where those contributions are paid during the tax-year concerned.
The pension savings amount does not include any ‘minimum payments’ or
‘amounts recovered’ under either section 8 Pension Schemes Act 1993, nor section
4 Pension Schemes (Northern Ireland) Act 1993 (these are certain types of
contracting-out rebate). All such amounts must be deducted from the pension
savings amount.
* Unallocated employer contributions that are held within the scheme before being
subsequently allocated to a particular individual’s arrangement, are only counted
within the pension savings amount at the time of that later allocation (that is, as
contributions in respect of the individual to whose arrangement they are then
allocated).
RPSM16102300 – Technical Pages: High income excess relief charge:
Pension savings amount: Cash balance arrangements: Contents
-------------------------------------------------------------------------------------------------------------------
Cash balance arrangements: Contents
RPSM16102310
Cash balance arrangements
RPSM16102330
Cash balance arrangements: Adjustment of closing rights
RPSM16102310 - Technical Pages: High income excess relief charge:
Pension savings amount: Cash balance arrangements
-------------------------------------------------------------------------------------------------------------------
Cash balance arrangements
[s213H]
The way in which you work out the amount of the pension savings amount in respect of
any cash balance arrangement depends on circumstances as follows:
•
If during the tax-year, the individual:
•
becomes entitled to a serious ill-health lump sum (see
RPSM09104610) under the arrangement or
•
they die,
the pension savings amount (in respect of that arrangement) for that year will be
nil.
•
If the circumstances do not match those above, then you need to calculate the
‘appropriate increase’ using the formula below:
(ACR x CARARF) – (UOR x OARARF)
These terms are defined below. In principle, the pension savings amount for the
arrangement is then the same as the ‘appropriate increase’. However there are a
couple of restrictions to consider:
•
If there are any ‘minimum payments’ or ‘amounts recovered’
(MPAR) under either section 8 Pension Schemes Act 1993, or
section 4 Pension Schemes (Northern Ireland) Act 1993 (these
are certain types of contracting-out rebate), then these amounts
must be deducted from the pension savings amount.
•
Also, as explained in RPSM16102020, if the resulting pension
savings amount is a negative figure, then the pension savings
amount for the arrangement is instead taken to be nil.
In conclusion, one might express the pension savings amount (PSA) formula more
completely as:
PSA = [(ACR x CARARF) – (UOR x OARARF) - MPAR] >= 0
ACR - the amount of the closing rights
This is a notional figure representing the amount which should be available for the
provision of benefits to (or in respect of) the individual under the arrangement, at the end
of the tax-year. This figure must be based on the following considerations:
•
Assume that the individual becomes entitled to all the then-current uncrystallised
cash balance benefits under the arrangement, at the end of the tax-year in
question.
•
Value these rights on the assumptions in:
•
•
section 277 FA 2004 (no early payment reductions or ill health
increases - there is a facility for these assumptions to be modified
by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust the resulting figure in accordance with RPSM16102330
CARARF - closing amount of rights age related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
It is applied in the formula above as a further adjustment to the closing rights.
UOR - up-rated opening rights
This is a notional figure representing the amount which was available for the provision of
benefits for (or in respect of) the individual under the arrangement, at the end of the
previous tax-year. This figure must be based on the following considerations:
•
Assume that at the end of the previous tax-year, the individual became entitled
to all the cash balance benefits that were actually uncrystallised in the
arrangement at that tax-year-end.
•
Value these rights on:
•
•
the assumptions in section 277 FA 2004 (no early payment
reductions or ill health increases - there is a facility for these
assumptions to be modified by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust (revalue) the figure obtained from the application of the considerations
above, by the ‘appropriate percentage’ to be set out in a Treasury Order (under
s213M(3)).
OARARF - opening amount of rights age related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
It is applied in the formula above as a further adjustment to the up-rated opening rights.
RPSM16102330 - Technical Pages: High income excess relief charge:
Pension savings amount: Cash balance arrangements – Adjustment of
closing rights
-------------------------------------------------------------------------------------------------------------------
Cash balance arrangements - Adjustment of closing rights
[s213I]
Transfers, pension sharing and surrenders
An adjustment to the amount of the closing rights (ACR) under a cash balance
arrangement should be made where the rights of an individual, are:
•
reduced by having become subject to a pension debit (in that case the closing
rights must be increased by the face-value amount of that reduction)
•
increased by having become entitled to a pension credit deriving from the
same or another registered pension scheme (in that case the closing rights
must be reduced by the face-value amount of that increase)
•
reduced by a transfer out, to a registered pension scheme or to a qualifying
recognised overseas pension scheme (in that case the closing rights must be
increased by the face-value amount of that reduction)
•
increased by a transfer from another pension scheme or arrangement, in to
the cash balance arrangement (in that case the closing rights must be reduced
by the face-value amount of that increase)
•
reduced by a surrender (or similar action) in realisation of an option that is
available to the individual under the arrangement (in that case the closing rights
must be increased by the face-value amount of that reduction).
In all cases, the adjustment must be for the same tax-year as that in which the above
event occurs.
Taking or allocating benefits
Where:
•
•
an individual becomes entitled (see RPSM11102410 and RPSM11102055) to any
of the following benefits under the cash balance arrangement:
•
an unsecured pension (BCE 1, see RPSM11104050),
•
a scheme pension, (BCE 2, see RPSM11104200),
•
a scheme pension increase (BCE 3, see RPSM11104300),
•
a lifetime annuity (BCE 4, see RSPM11104500),
•
a pension commencement lump sum, or lifetime allowance
excess lump sum (BCE 6 see RPSM11104700, but excluding
becoming entitled to a serious ill health lump sum), or
there is an allocation of rights to the individual under the arrangement not falling
within the first four bullets above (BCEs 1-4),
then the closing rights must be increased, by the total face-value amount of the rights that
were actually used to provide the benefits in question, and by the amount of the rights
that were allocated away.
In all cases, the adjustment must be for the same tax-year as that in which the above
event occurs.
RPSM16102400 – Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements: Overview:
Contents
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangements overview: Contents
RPSM16102410
Defined benefits arrangements - Overview
RPSM16102410 - Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements - Overview
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangements - Overview
[s213J ]
The way in which you work out the amount of the pension savings amount in respect of
any defined benefits arrangement depends on circumstances as follows:
•
If during the tax-year, the individual:
•
becomes entitled to a serious ill-health lump sum (see
RPSM09104610) under the arrangement or
•
they die,
the pension savings amount (in respect of that arrangement) for that year will be
nil.
•
If the circumstances do not match those above, then the pension savings
amount is the total of:
•
the ‘appropriate pension increase’, see RPSM16102520, and
•
the ‘appropriate lump sum increase’, see RPSM16102620.
This is however subject to a couple of restrictions:
•
if there are any ‘minimum payments’ or ‘amounts recovered’
under either section 8 Pension Schemes Act 1993, or section 4
Pension Schemes (Northern Ireland) Act 1993 (these are certain
types of contracting-out rebate), then these amounts must be
deducted from the pension savings amount.
•
Also, as explained in RPSM16102020, if the resulting pension
savings amount is a negative figure, then the pension savings
amount for the arrangement is instead taken to be nil.
RPSM16102500 – Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits pensions: Contents
-------------------------------------------------------------------------------------------------------------------
Defined benefits pensions: Contents
RPSM16102520
Defined benefits arrangements – Appropriate pension increase
RPSM16102560
Defined benefits arrangements - Adjustment of closing pension
RPSM16102520 - Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements – Appropriate
pension increase
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangement - Appropriate pension increase
[s213J ]
The ‘appropriate pension increase’ is calculated as follows:
(ACP x CAPARF) – (UOP x OAPARF)
ACP – amount of the closing pension
This is a notional figure representing the annual rate of pension which should be available
to the individual under the arrangement, at the end of the tax-year. This figure must be
based on the following considerations:
•
Assume that the individual becomes entitled to all the then-current uncrystallised
defined benefits under the arrangement, at the end of the tax-year in question.
•
Value the pension on the assumptions in:
•
•
section 277 FA 2004 (no early payment reductions or ill health
increases - there is a facility for these assumptions to be modified
by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust the resulting figure in accordance with RPSM16102560.
CAPARF - closing amount of pension age-related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
UOP - up-rated opening pension
This is a notional figure representing the annual rate of pension to which the individual
could have become entitled at the end of the previous tax-year. This figure must be based
on the following considerations:
•
Assume that at the end of the previous tax-year, the individual became entitled
to all the pension rights that were actually uncrystallised in the arrangement, at
that tax-year-end.
•
Value these rights on:
•
•
the assumptions in section 277 FA 2004 (no early payment
reductions or ill health increases - there is a facility for these
assumptions to be modified by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust (revalue) the figure obtained from the application of the considerations
above, by the ‘appropriate percentage’ to be set out in a Treasury Order (under
s213M(3)).
OAPARF - opening amount of pension age-related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
RPSM16102560 - Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements - Adjustment of
closing pension
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangements - Adjustment of closing pension
[s213K]
An adjustment to the amount of closing pension (ACP) (described in RPSM16102520)
should be made where the annual rate of the pension which would be payable to an
individual, during the tax-year, was:
•
reduced by having become subject to a pension debit (in that case ACP must
be increased by the face-value amount of that reduction)
•
increased by any pension credit deriving from the same or another registered
pension scheme (in that case ACP must be reduced by the face-value amount
of that increase)
•
reduced by a transfer of rights, out to a registered pension scheme or
qualifying recognised overseas pension scheme (in that case ACP must be
increased by the face-value amount of that reduction)
•
increased by a transfer in of rights from another pension scheme (in that case
ACP must be reduced by the face-value amount of that increase)
•
reduced by any commutation, allocation or surrender, or similar action, in
realisation of an option that is available to the individual under the
arrangement (in that case ACP must be increased by the face-value amount of
that reduction).
Where an individual becomes entitled (see RPSM11102050) to any of the following benefits
under the arrangement:
•
a scheme pension, (BCE 2, see RPSM11104200),
•
a scheme pension increase (BCE 3, see RPSM11104300),
then the face-value amount of the annual rate of pension to which the individual became
entitled (other than by commutation of lump sum) is to be added to ACP.
In all cases, the adjustment must be for the same tax-year as that in which the above
event occurs.
RPSM16102600 – Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits lump sums: Contents
-------------------------------------------------------------------------------------------------------------------
Defined benefits lump sums: Contents
RPSM16102620
Defined benefits arrangements – Appropriate lump sum increase
RPSM16102660
Defined benefits arrangements – Adjustment of closing lump sum
RPSM16102620 - Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements – Appropriate
lump sum increase
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangement - Appropriate lump sum increase
[s213J ]
The ‘appropriate lump sum increase’ is calculated as follows:
(ACLS x CALSARF) – (UOLS x OALSARF)
ACLS – amount of closing lump sum
This is a notional figure representing the lump sum which should be available to the
individual under the arrangement, at the end of the tax-year. This figure must be based
on the following considerations:
•
Assume that the individual becomes entitled to all the then-current uncrystallised
rights under the arrangement, at the end of the tax-year in question.
•
Value the lump sum on the assumptions in:
•
•
section 277 FA 2004 (no early payment reductions or ill health
increases - there is a facility for these assumptions to be modified
by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust the resulting figure in accordance with RPSM16102660.
CALSARF - closing amount of lump sum age-related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
UOLS - up-rated opening lump sum
This is a notional figure representing the lump sum to which the individual could have
become entitled at the end of the previous tax-year. This figure must be based on the
following considerations:
•
Assume that at the end of the previous tax-year, the individual became entitled
to all the lump sum rights that were actually uncrystallised in the arrangement,
at that tax-year-end.
•
Value these rights on:
•
•
the assumptions in section 277 FA 2004 (no early payment
reductions or ill health increases - there is a facility for these
assumptions to be modified by regulations)
•
There is also a facility for further regulations to be made that
provide additional assumptions.
Adjust (revalue) the figure obtained from the application of the considerations
above, by the ‘appropriate percentage’ to be set out in a Treasury Order (under
s213M(3)).
OALSARF - opening amount of lump sum age-related factor
This is the age-related factor that applies to the case in hand according to RPSM16102800.
RPSM16102660 - Technical Pages: High income excess relief charge:
Pension savings amount: Defined benefits arrangements – Adjustment of
closing lump sum
-------------------------------------------------------------------------------------------------------------------
Defined benefits arrangements - Adjustment of closing lump sum
[s213K ]
An adjustment to the amount of closing lump sum (ACLS) (described in RPSM16102620)
should be made where all or part of any lump sum which counts, or would have counted
within ACLS for a given tax-year, has within that same tax-year been:
•
reduced or eliminated, by having become subject to a pension debit (in that
case ACLS must be increased by the face-value amount of that reduction)
•
increased by any pension credit deriving from the same or another registered
pension scheme (in that case ACLS must be reduced by the face-value amount
of that increase)
•
reduced or eliminated, by a transfer of rights, out to a registered pension
scheme or qualifying recognised overseas pension scheme (in that case
ACLS must be increased by the face-value amount of that reduction)
•
increased by a transfer in of rights from another pension scheme (in that case
ACLS must be reduced by the face-value amount of that increase)
•
reduced or eliminated, by any (reverse) commutation, allocation or surrender, or
similar action, in realisation of an option that is available to the individual under
the arrangement (in that case ACLS must be increased by the face-value
amount of that reduction).
Where an individual becomes entitled (RPSM11102055) to any of the following benefits
under the arrangement:
•
a pension commencement lump sum, or
•
lifetime allowance excess lump sum
that is, a BCE 6 (RPSM11104700) arises (but excluding one that arises upon becoming
entitled to a serious ill health lump sum), then the face-value amount of the lump sum to
which the individual became entitled (other than by reverse commutation of pension) is to
be added to ACLS.
In all cases, the adjustment must be for the same tax-year as that in which the above
event occurs.
RPSM16102800 – Technical Pages: High income excess relief charge:
Pension savings amount: Age related factors: Contents
-------------------------------------------------------------------------------------------------------------------
Age-related factors: Contents
RPSM16102810
Age-related factors
RPSM16102810 - Technical Pages: High income excess relief charge:
Pension savings amount: Age-related factors
-------------------------------------------------------------------------------------------------------------------
Age-related factors
[s213L]
The Treasury are to make regulations about the age-related factors in relation to rights
age-related factors and lump sum age-related factors and pension age-related factors.
RPSM16103000 - Technical Pages: High income excess relief charge: The
appropriate rate: Contents
-------------------------------------------------------------------------------------------------------------------
The appropriate rate: Contents
RPSM16103010
Determining the appropriate rate
RPSM16103020
What is ‘reduced net income’?
RPSM16103030
Calculating reduced net income – step 1
RPSM16103040
Calculating reduced net income – step 2
RPSM16103050
Calculating reduced net income – step 3
RPSM16103060
What is the basic rate limit and the higher rate limit?
RPSM16103070
Example of how to calculate the appropriate rate for someone not on
the taper
RPSM16103080
Example 2 of how to calculate the appropriate rate for someone not on
the taper
RPSM16103090
The appropriate rate for those with gross income below £179,001: the
taper
RPSM16103100
Example 1 of how to calculate the appropriate rate for someone on the
taper
RPSM16103110
Example 2 of how to calculate the appropriate rate for someone on the
taper
RPSM16103120
Example 3 of how to calculate the appropriate rate for someone on the
taper
RPSM16103010 - Technical Pages: High income excess relief charge: The
appropriate rate: Determining the appropriate rate
-------------------------------------------------------------------------------------------------------------------
Determining the appropriate rate
[s213E]
The rate of the high income excess relief charge is the appropriate rate in respect of
the individual’s total pension savings amount.
‘The appropriate rate’ in relation to the total pension savings amount in the case of the
individual for a tax year is:
•
0% in relation to so much (if any) of that amount as, when added to the
individual’s reduced net income (see RPSM16103020) for the tax year, does not
exceed the basic rate limit
•
20% in relation to so much (if any) of that amount as, when so added, exceeds the
basic rate limit but does not exceed the higher rate limit
•
30% in relation to so much (if any) of that amount as, when so added, exceeds the
higher rate limit
RPSM16103060 explains what the basic rate limit and the higher rate limit is.
Example
Fiona is has income of £185,000 and made pension contributions of £160,000 to an
occupational pension scheme under the net pay arrangement. As a result her
‘reduced net income’ is £25,000. Fiona’s total pension saving amount is £160,000.
Suppose the higher rate limit is £150,000 and the basic rate limit is £40,000 (these
figures are hypothetical only). This means that of Fiona’s £160,000 total pension
saving amount the appropriate rate is
£35,000 @ 30%
£110,000 @ 20%
£15,000 @ 0%
RPSM16103070 to RPSM16103080 give more examples of how to calculate the appropriate
rate for individuals who are not on the taper, i.e. have gross income of £179,001 or more.
Individuals with gross income of £150,000 to £179,000: the taper
Where the individual’s gross income for the tax year is less than £180,000 the percentages
at bullet points 2 and 3 above are each reduced (but to no less than 0%) by 1 percentage
point for every £1,000 by which it is less than £180,000.
RPSM16103090 to RPSM16103120 explains how this tapering of the high income excess
relief charge works.
RPSM16103020 - Technical Pages: High income excess relief charge: The
appropriate rate: What is ‘reduced net income’?
-------------------------------------------------------------------------------------------------------------------
What is ‘reduced net income’?
[s213E(3)]
‘Reduced net income’ is the amount found after step 3 of section 23 ITA 2007. Although
there are many similarities this is not the same definition of income as relevant income
(see RPSM16101100) or gross income (see RPSM16101300).
After step 3 of ITA 2007 an individual has
•
identified total income (step 1 s23 ITA 2007) – see RPSM16103030;
•
deducted all reliefs listed at s24 ITA 2007 (step 2 s23 ITA 2007 – see
RPSM16103040); and
•
deducted any personal allowances they may have (step 3 s23 ITA 2007) –
see RPSM16103050.
At this stage deductions have been made for the following member contributions
•
contributions paid to a registered pension scheme under the net pay
arrangement (both paid via the payroll and a claim for excess relief made via the
SA Return
•
contributions paid to a retirement annuity contract that are not made under
relief at source
•
contributions by a member of a public service pension scheme or marine pilots’
fund who is not an employee that are not made under relief at source, and
•
contributions made to an overseas pension scheme where the individual
qualifies for either migrant member relief or transitional corresponding relief (see
RPSM13101000).
In this context member contributions means contributions paid by the member or by
someone else (apart from the member’s employer) on behalf of the member
The following pension contributions are not included in the calculation of ‘reduced net
income’
•
any contribution paid to a registered pension scheme using the relief at source
method, and
•
employer contributions
So how an individual makes their contribution can affect the amount of their reduced net
income.
Example
Judy and Chris both have employment income of £140,000. Both make member
contributions of £15,000. They also both have employer contributions made of
£20,000. However Judy is pensioned through her employer’s occupational
pension scheme that operates the net pay arrangement, Chris is building up his
pension under a personal pension scheme that has to use relief at source.
Because Judy makes her pension contribution using the net pay arrangement her
‘reduced net income’ is £125,000.
As Chris makes his contribution using relief at source his ‘reduced net income’ is
£140,000.
The calculation of ‘reduced net income’ forms part of the ordinary Self Assessment
calculation. So if you have any questions about what is included at this stage you should
consult the individual’s accountant or tax adviser in the first instance. If they are unable
to answer your question you should contact the tax office that deals with the individual’s
personal tax affairs not Pension Schemes Services.
RPSM16103030 - Technical Pages: High income excess relief charge: The
appropriate rate: Calculating reduced net income – step 1
-------------------------------------------------------------------------------------------------------------------
Calculating reduced net income – step 1
[s213E(3) & step 1 s23 ITA 2007]
To start, take the total amount of the individual’s income that is within the charge to
income tax for the tax year in question. This is the amount of income that is the figure at
the first stage of section 23 Income Tax Act 2007 and is the starting point for calculating
your liability to income tax under Self Assessment.
This figure of total income includes:
•
earnings from employment
•
earnings from self-employment/partnerships
•
most pensions income (State, occupational, and personal pensions)
•
interest on most savings
•
income from shares (dividend income)
•
rental income, and
•
income received by an individual from a trust
•
redundancy and other termination payments (except for the first £30,000)
It does not, however, include any amounts giving rise to income tax liabilities which are
not treated as income for general tax purposes in connection with:
•
the recovery of excessive relief where the individual’s self-assessment for the tax
year is final (for example, the withdrawal or reduction of Enterprise Investment
Scheme relief or excess credit for overseas tax)
•
deduction of tax at source where the liability is not in respect of the individual’s
own liability and
•
stand-alone tax charges (for example, tax charges in respect of an unauthorised
payment from a registered pension scheme).
The full list of amounts not included in the amount of “total income” is in sections 30 and
32 Income Tax Act 2007.
If you have any questions about what is included at this stage you should consult the
individual’s accountant or tax adviser in the first instance. If the adviser is unable to
answer your question you should contact tax office that deals with the individual’s personal
tax affairs not Pension Schemes Services.
RPSM16103040 - Technical Pages: High income excess relief charge: The
appropriate rate: Calculating reduced net income – step 2
-------------------------------------------------------------------------------------------------------------------
Calculating reduced net income – step 2
[s213E(3) & step 2 s23 ITA 2007]
Deduct from the adjusted total income figure found after step 1 (see RPSM16103030) any
amounts upon which the individual was entitled to tax relief for the tax year which arise
under the list in section 24 Income Tax Act 2007
These deductible items are mainly concerned with deductions for trade and property
losses, but include other items.
The list includes (all references are to Income Tax Act 2007 unless otherwise stated):
•
trade loss relief against general income (section 64)
•
carry-forward trade loss relief (section 83)
•
terminal trade loss relief (section 89)
•
post-cessation trade relief (section 96)
•
carry-forward property loss relief (section 118)
•
property loss relief against general income (section 120)
•
post cessation property relief (section 125)
•
employment loss relief against general income (section 128)
•
share loss relief (Chapter 6 of Part 4)
•
loss relief against miscellaneous income (section 152)
•
relief on gifts of shares, securities and real property to charities (chapter 3 part 8)
•
relief given on certain pension contributions (section 193(4) & 194(1) FA 2004).
Some types of loss relief can be deducted only from the kind of income that gave rise to
the loss, and the amount the individual is entitled to for the year is therefore limited to the
amount of that kind of income. For example, the individual has carry-forward trade losses
of £5,000 for 2011/12 but their trading income for that year is £3,000. The individual is
therefore entitled to deduct carry-forward trade loss relief of only £3,000, so the net
trading income for 2011/12 is £nil, for the purposes of this step.
This step forms part of the ordinary Self Assessment calculation. If you have any
questions about what deductions can be made at this stage you should consult the
individual’s accountant or tax adviser in the first instance. If the adviser is unable to
answer your question you should contact the tax office that deals with the individual’s
personal tax affairs not Pension Schemes Services.
RPSM16103050 - Technical Pages: High income excess relief charge: The
appropriate rate: Calculating reduced net income – step 3
-------------------------------------------------------------------------------------------------------------------
Calculating reduced net income – step 3
[s213E(3) & step 3 s23 ITA 2007]
Deduct from the income figure found after step 2 (see RPSM16103040) any allowances to
which the member is entitled such as,
•
personal allowances, including any increased allowance for those age 65 and over,
and
•
blind person’s allowance.
This step forms part of the ordinary Self Assessment calculation. If you have any
questions about what personal allowances are due you should consult the individual’s
accountant or tax adviser in the first instance. If the adviser is unable to answer your
question you should contact the tax office that deals with the individual’s personal tax
affairs not Pension Schemes Services.
RPSM16103060 - Technical Pages: High income excess relief charge: The
appropriate rate: What is the basic rate limit and the higher rate limit?
-------------------------------------------------------------------------------------------------------------------
What is the basic rate limit and the higher rate limit?
[s280 & s10 ITA 2007]
The basic rate limit
The basic rate limit is defined by s10 ITA 2007. It is the point at which basic rate tax
ceases to apply, and higher rate tax starts. So for 2010/11 the basic rate limit is £37,400.
The higher rate limit
The higher rate limit is also defined by s10 ITA 2007. It is the point at which higher rate
tax ceases to apply, and additional rate tax starts. So for 2010/11 the higher rate limit is
£150,000.
If an individual has made
•
pension contributions under relief at source, or
•
gift aid donations
The basic rate limit and the higher rate limit are each extended by the gross amount of the
contributions/donations.
Example
Linda has employment income of £200,000, and savings income of £15,000. Each
year Linda makes a £40,000 net contribution to her personal pension scheme
that uses relief at source. She also makes a donation of £2,000 to her favourite
charity using gift aid.
Assume for the purposes of this example that the normal basic rate limit is £40,000
and the normal higher rate limit is £150,000. The pension contribution and gift aid
donation increase Linda’s basic rate limit and higher rate limit. The £40,000 Linda
pays to her scheme is has a gross value of £50,000. Similarly gift aid donations
are grossed up, so that the £2,000 Linda physically pays to her favourite charity
has a gross value for tax purposes of £2,500. Linda’s basic and higher rate limits
are increased by £52,500 so that her basic rate limit is £92,500 and her higher rate
limit is £202,500.
RPSM16103070 - Technical Pages: High income excess relief charge: The
appropriate rate: Example 1 – not on taper
-------------------------------------------------------------------------------------------------------------------
Example 1 of how to calculate the appropriate rate for someone not on the taper
Gary has a salary of £155,000 and no other taxable income. He makes a £15,000
contribution into his employer’s occupational pension scheme and his employer makes
a £25,000 contribution. The scheme provides money purchase benefits.
This means that
•
Gary’s total pension saving amount is £40,000, and
•
his gross income is £180,000 so the standard appropriate rate applies as he is not
on the taper;
Assume that for the tax year the standard personal allowance is £6,500; basic rate limit is
£40,000 and the higher rate limit is £150,000. (These amounts are hypothetical only.)
this means that,
•
Gary does not qualify for a personal allowance so his reduced net income is
£140,000,
•
his basic rate limit is £40,000, and
•
His higher rate limit is £150,000.
As Gary’s reduced net income is already above his basic rate limit, none of the pension
saving amount is liable at 0%.
The difference between Gary’s reduced net income and his higher rate limit is £10,000.
Gary’s total pension saving amount is more than this so £10,000 is liable at 20%.
The excess of £30,000 of the pension saving amount over Gary’s higher rate limit is liable
at 30%
So the appropriate rate is
£0 @ 0%
£10,000 @ 20% , and
£30,000 @ 30%
Giving a high income excess relief charge of £11,000.
RPSM16103080 - Technical Pages: High income excess relief charge: The
appropriate rate: Example 2 – not on taper
-------------------------------------------------------------------------------------------------------------------
Example 2 of how to calculate the appropriate rate for someone not on the taper
David has employment income of £130,000 and savings income of £10,000. He pays
regular contributions of 6% salary to his defined benefits occupational pension scheme,
i.e. £7,800. David also pays contributions to a free-standing AVC (FSAVC) scheme that
operates relief at source. He pays £28,000 net to the FSAVC which when grossed up for
basic rate relief has a value of £35,000. The pension saving amount for David’s defined
benefits arrangement is £60,000. David also makes a £400 donation under gift aid,
which means the amount is grossed up to a £500 donation for tax purposes.
Assume that for the tax year the standard personal allowance is £6,500; basic rate limit is
£40,000 and the higher rate limit is £150,000. (These amounts are hypothetical only.)
David has gross income is £192,200 so the taper does not apply to him, and his total
pension saving amount is £95,000 made up of
•
£35,000 from the FSAVC which is an other money purchase arrangement, and
•
£60,000 for the defined benefits arrangement.
As David’s income after reductions for member contributions is less than £100,000 David
has a full personal allowance. David’s reduced net income is therefore £125,700.
The payment of the contribution to the FSAVC and gift aid donation increase David’s basic
rate limit to £75,500 and his higher rate limit to £185,500.
As David’s reduced net income is already above his basic rate limit, none of the pension
saving amount is liable at 0%.
The difference between David’s reduced net income and his higher rate limit is £59,800.
David’s total pension saving amount is more than this so £59,800 is liable at 20%.
The excess of £35,200 excess of the pension saving amount over David’s higher rate limit
is liable at 30%
So the appropriate rate is
£0 @ 0%
£59,800 @ 20% , and
£35,200 @ 30%
Giving a high income excess relief charge of £22,520.
RPSM16103090 - Technical Pages: High income excess relief charge: The
appropriate rate: The appropriate rate for those with gross income below
£179,001: the taper
-------------------------------------------------------------------------------------------------------------------
The appropriate rate for those with gross income below £179,001: the taper
[section 213E(2)]
For individuals with gross income of less than £180,000 the appropriate rate is reduced.
The percentage for amounts above the basic and higher rate limits are each reduced (but
to no less than 0%) by 1 percentage point for every £1,000 by which it is less than
£180,000. The table below shows the appropriate rates for each band of gross income
below £180,000.
RPSM16103100 to RPSM16103120 give examples of how to calculate the appropriate rate
for someone on the taper.
Gross income
Appropriate rate on pension
saving amount above
higher rate limit
Appropriate rate on pension
saving amount above basic rate
limit but below higher rate limit
£178,001 to £179,000
29%
19%
£177,001 to £178,000
28%
18%
£176,001 to £177,000
27%
17%
£175,001 to £176,000
26%
16%
£174,001 to £175,000
25%
15%
£173,001 to £174,000
24%
14%
£172,001 to £173,000
23%
13%
£171,001 to £172,000
22%
12%
£170,001 to £171,000
21%
11%
£169,001 to £170,000
20%
10%
£168,001 to £169,000
19%
9%
£167,001 to £168,000
18%
8%
£166,001 to £167,000
17%
7%
£165,001 to £166,000
16%
6%
£164,001 to £165,000
15%
5%
£163,001 to £164,000
14%
4%
£162,001 to £163,000
13%
3%
£161,001 to £162,000
12%
2%
£160,001 to £161,000
11%
1%
£159,001 to £160,000
10%
0%
£158,001 to £159,000
9%
0%
£157,001 to £158,000
8%
0%
£156,001 to £157,000
7%
0%
£155,001 to £156,000
6%
0%
£154,001 to £155,000
5%
0%
£153,001 to £154,000
4%
0%
£152,001 to £153,000
3%
0%
£151,001 to £152,000
2%
0%
£150,001 to £151,000
1%
0%
RPSM16103100 – Technical Pages: High income excess relief charge: The
appropriate rate: Example 1 of how to calculate the appropriate rate for
someone on the taper
-------------------------------------------------------------------------------------------------------------------
Example 1 of how to calculate the appropriate rate for someone on the taper
Ken has income of £135,000. Ken’s employer makes a contribution to his pension which is
an other money purchase arrangement of £20,000. Ken does not make any pension
contributions.
Ken’s total pension savings amount is £20,000. His gross income is £155,000. This
puts Ken on a taper rate of 0% for so much of his pension savings amount is higher
than his basic rate limit but less then his higher rate limit and 5% on so much of his
pension savings amount that is more than his higher rate limit.
Assume for the purposes of this example that the standard personal allowance is £6,500,
the standard basic rate limit is £40,000 and the standard higher rate limit is £150,000
(these figures are hypothetical).
Ken does not qualify for a personal allowance so his reduced net income is £135,000. His
basic rate limit and higher rate limit are the standard amounts £40,000 and £150,000
respectively.
As Ken’s reduced net income is already above his basic rate limit, none of the total pension
savings amount is liable at 0%.
The difference between Ken’s reduced net income and his higher rate limit is £15,000.
This amount is liable at the taper rate of 0%.
The £5,000 excess of the total pension savings amount over Ken’s higher rate limit is liable
at the taper rate of 5%
So the appropriate rate is
£0 @ 0%
£15,000 @ 0% , and
£5,000 @ 5%
Giving a high income excess relief charge of £250.
RPSM16103110 – Technical Pages: High income excess relief charge: The
appropriate rate: Example 2 of how to calculate the appropriate rate for
someone on the taper
-------------------------------------------------------------------------------------------------------------------
Example 2 of how to calculate the appropriate rate for someone on the taper
Avril is self-employed and her income from this self-employment is £169,000. She also
has taxable savings income of £500.
Avril makes a net contribution of £48,000 to her personal pension scheme. This is grossed
up through relief at source to £60,000. This means Avril’s total pension savings
amount is £60,000.
Avril’s gross income is £169,500. This puts Avril on a taper rate of 10% for so much of
her pension savings amount as is higher than her basic rate limit but less than her
higher rate limit and 20% on so much of her pension saving amount that is more than her
higher rate limit.
Assume for the purposes of this example that the standard personal allowance is £6,500,
the standard basic rate limit is £40,000 and the standard higher rate limit is £150,000
(these figures are hypothetical).
Avril’s income after reduction for member contributions is £109,500 so she qualifies for a
personal allowance (but reduced to £1,750). Her ‘reduced net income’ is therefore
£167,750 (£169,000 less £1,750).
The pension contribution paid using relief at source increases Avril’s basic and higher rate
limits by £60,000 so that she has a basic rate limit of £100,000 and a higher rate limit of
£210,000.
As Avrils’ reduced net income (£167,750) is already above her basic rate limit of £100,000
none of the total pension savings amount is liable at 0%.
The difference between Avril’s reduced net income and her higher rate limit is £42,250.
This amount is liable at the taper rate of 10%.
The £17,750 remainder of Avril’s total pension savings amount (£60,000 - £42,250) over
her higher rate limit is liable at the taper rate of 20%
So the appropriate rate is
£0 @ 0%
£42,250 @ 10% , and
£17,750 @ 20%
Giving a high income excess relief charge of £7,775.
RPSM16103120 – Technical Pages: High income excess relief charge: The
appropriate rate: Example 3 of how to calculate the appropriate rate for
someone on the taper
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Example 3 of how to calculate the appropriate rate for someone on the taper
Paul has a salary of £120,000. He also has taxable savings income of £10,500. He has
not entered into any salary sacrifice or flexible remuneration arrangement. So Paul has a
‘relevant income’ of £130,500.
Paul make a £70,000 net contribution to a personal pension scheme using relief at
source. This has a gross value of £87,500. Paul also pays 5% salary, i.e. £6,000 to the
occupational pension scheme run by his employer, which provides defined benefits.
The pension saving amount for this defined benefit arrangement is £36,000.
This means that Paul’s gross income is £160,500. This puts Paul on a taper rate of 1% for
so much of his pension saving amount is higher than his basic rate limit but less then his
higher rate limit and 11% on so much of his pension saving amount that is more than his
higher rate limit.
Paul’s total pension savings amount is £123,500, made up of
•
£36,000 from the defined benefits arrangement, and
•
£87,500 from the personal pension scheme which is an other money purchase
arrangement.
Paul also makes donations £600 to various charities. These donations were paid using gift
aid so have a grossed up value of £750.
Assume for the purposes of this example that the standard personal allowance is £6,500,
the standard basic rate limit is £40,000 and the standard higher rate limit is £150,000
(these figures are hypothetical).
As Paul’s income after reductions for member contributions is less than £100,000 he has a
full personal allowance. Paul’s reduced net income is therefore £118,000. The pension
contribution paid using relief at source and the gift aid donations increase Paul’s basic rate
limit to £128,250 and his higher rate limit to £238,250.
Paul’s reduced net income is less than his basic rate limit. The difference between his
reduced net income and his basic rate limit (£10,250) has an appropriate rate of 0%. This
leaves £113,250 of the total pension saving amount where the appropriate rate still has to
be calculated.
The difference between Paul’s basic rate limit and higher rate limit is £110,000. This is
less than the remainder of Paul’s total pension saving amount. So £110,000 is liable at an
appropriate rate of 1%.
The remaining £3,250 of the total pension saving amount above Paul’s higher rate limit is
liable to the high income excess relief charge at 11%.
So the appropriate rate for Paul is
£10,250 @ 0%
£110,000 @ 1% , and
£3,250 @ 11%
Giving a high income excess relief charge of £1,457.50.
RPSM16104000 - Technical Pages: High income excess relief charge:
Anti-avoidance: Contents
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Anti-avoidance: Contents
RPSM16104010
Definition of anti-avoidance
RPSM16104020
Treatment where there is a ‘high income excess relief charge scheme’
RPSM16104010 - Technical Pages: High income excess relief charge:
Anti-avoidance: Definition of anti-avoidance
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Definition of anti-avoidance
[s213O]
An anti-avoidance rule applies if there is a ‘high income excess relief charge scheme’ in
respect of an individual for the tax year.
Broadly, the scheme involves the member reducing their gross or relevant income or their
total pension savings amount, but is subject to such a reduction being redressed by an
increase in their income or pension savings amount in a different year or the provision of
some other benefit.
How an individual is treated for the purpose of the high income excess relief charge for
a tax year where there is a high income excess relief charge scheme in relation to the
individual for that year is explained in RPSM16104020.
Meaning of ‘high income excess relief charge scheme’
A scheme is a ‘high income excess relief charge scheme’ if in the case of the individual for
the tax year the following conditions are met:
Condition A
Condition A is that it is reasonable to assume that the main purpose, or one of the main
purposes, of the scheme is to avoid the whole or any part of the liability of the individual
to the high income excess relief charge for the tax year.
Condition B
Conditions B is that the scheme involves either or both of the following –
•
reducing the individual’s gross income or relevant income for the tax year, and
•
reducing the individual’s total pension savings amount for the tax year.
Condition C
Condition C is that the scheme involves the reduction, or any of the reductions, being
redressed by –
•
an increase in the individual’s gross income, relevant income or total pension
savings amount for a different tax year, or
•
the provision at any time of some other benefit to or for the benefit of the
individual or any person who is a dependent of, or is connected with, the individual
A scheme includes any arrangement, agreement, understanding, transaction or series of
transactions (whether or not legally enforceable)
The meaning of connected’ person as defined in section 993 Income Tax Act 2007 apply
for the purposes of the above provisions. Broadly, this includes a spouse, civil partner or
relative.
RPSM16104020 - Technical Pages: High income excess relief charge:
Anti-avoidance: Treatment where there is a ‘high income excess relief
charge scheme’
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Treatment where there is a ‘high income excess relief charge scheme’
[s213O(6)]
Where there is a ‘high income excess relief charge scheme’ (see RPSM16104010) for the
purposes of the high income excess relief charge the individual is to be treated as if
their:
•
‘gross income’ for the tax year, and
•
total pension savings amount for the tax year
were what they would be apart from the ‘high income excess relief charge scheme’.