High-earning UK contractors are set to have their ability to financially plan for retirement penalised by new tax laws. Tony Harris from Contractor Financials, Independent Financial Advisors (IFAs) comets, “Until now, contractors have legitimately used pension contributions to invest tax efficiently and to plan for their retirement – a strategy strongly encouraged by a government keen to get people to save for their futures.” He continues, “Removing and reducing tax relief sends some very mixed messages. This is especially concerning as there’s an element of retrospective taxation which is against long-established principles of taxation policy.
Prior to the Budget in April, contractors we allowed to invest sizeable amounts into pension funds as per government recommendations. However, the Chancellor has announced these changes which mean that from April 2011, contractors who earn over £150,000 per annum will no longer have tax relief contributions to pension funds.
To prevent contractors who attempt to plough large sums of cash into funds prior to these rules coming into effect in 2011, the Chancellor has put “anti-forestalling rules” into place. This means that contractors earning £150,000 and above will only be in receipt of tax relief at the rate of 20% on contributions to their pension above £20,000 which is the ‘special annual allowance’. Contractors earning below this amount could effectively plough the lot into their pension fund. Any contractors paying money over and above the limit will be required to pay back the difference between the basic and higher tax relief rate through their tax return.
Tax relief benefits still apply to those who have paid regular contributions to a pension fund before 22 April 2009, even if they exceed the £20,000 limit, providing the regular payments are maintained.