A note to clear up any queries in relation to the definition of relevant income for the purposes of Special Annual Allowance Charge (SAAC) (pensions anti-forestalling charge).

Please note that the Government dropped the changes for 2011 so this piece is now of historical interest to show the dangers of ill thought out legislation.

In articles Taxation and Tax Adviser magazines I discussed the pensions proposals for the High Income Excess relief Charge (HIERC) which were intended to restrict higher rate tax relief on pensions savings made from 2011/12 (note these rules were dropped in July 2010). The proposals include a new version of the definition of relevant income for the purposes of the restriction. 

I want to draw to the attention of advisers that this does not affect the definition of relevant income for the purposes of the SAAC that applies to restrict tax relief for higher earners on certain on-off or irregular contributions made in 2009/10 and 2010/11. That definition of relevant income found in paragraph 2(1)  Schedule 35 of Finance Act 2009 as modified on 9 December 2009 so that an individual will be a high income individual for the purposes of the special annual allowance rules if their relevant income for the tax year is £130,000 and over. 

The main differences between the two definitions concern deductions for pensions and gift aid. Both definitions share the same starting point for relevant income, this is income from all sources, less allowable expenses, employment expense. There should also be added back any salary sacrifice made after 22 April 2009 which has been made to secure an increase in pensions benefits. 

  • For the SAAC a deduction is allowed for gift aid. However, a deduction for pension contributions is only permitted to a subject to a maximum of £20,000.
  • For the purposes of the HIERC relevant income is proposed as for the SAAC, but with no deductions for gift aid or pension contributions.

June 22 2010 Budget Update: Please note that the new Government dropped all plans for the HIERC, see Pensions: tax rules and planning