Pensions changes will hit high earning farmers
High earning farmers could lose up to £75,000 a year in tax relief when new limits on annual pension contributions take effect next April. The changes will have a disproportionate effect on those who run businesses with fluctuating incomes, warn accountants.
The government confirmed yesterday (14 October) that long planned pension reforms will be introduced in April 2011, limiting the level of contributions on which tax relief is available.
Tax relief on contributions means that for every £1 invested in a pension, a basic rate tax payer contributes 80p, with tax relief making up the remainder. For 40% rate taxpayers, each 60p invested is made up to £1 by 40p in tax relief.
The changes will see the annual contribution allowance slashed from £255,000 to £50,000 from April 2011. Compared with the current regime, this means an effective cut of £75,000 in the relief available in one year for those able to make maximum contributions.
“A reduced annual limit of £50,000 is based on the model of regular income and regular pension contributions,” said Andrew Arnott, a partner in accountant Saffery Champness.
“This effectively discriminates against the self-employed or small rural business owners whose income patterns are less predictable.
“While the new rules stipulate that allowances will be made to provide for relief on pension contributions from a one-off spike in income it is as yet not clear whether this would apply literally to a one-off situation or whether such an exercise could be repeated every few years when income allowed.”
Those who have the income or profits to do so should act now to make the most of the current regime, say advisors.
“Those earning less than £130,000 a year over the past three years stand to gain the most tax relief by acting before the changes come into effect next April, as higher earners may already be restricted to full tax relief on contributions up to £20,000,” says Steve Woodham of west country accountant Old Mill.
“That said, higher earners who want to add large sums to their pension pot would be best advised to do so now, before the annual allowance is expected to be cut.”
Sole traders or partnerships can currently pay up to 100% of their earnings into their pension, up to a maximum of £255,000. Those in a company could either fund the pension with individual or company contributions, or a mixture of both.
However, pension holders should be careful to understand how the scheme dates work, as some self-invested schemes may operate on different year ends to the tax year, warned Mr Woodham.