The government is making tax and national insurance changes that will come into effect in the new tax year 2008/09, beginning 6 April 2008. At the moment, tax is calculated on four bands of earnings;
The first £5,225 is tax free. This is known as your personal allowance.
The next £2,230 is taxed at 10%.
Above that, the next £32,370 is taxed at the basic rate of 22%.
Anyone earning more than £39,825 is taxed at the higher rate of 40% on earnings above this threshold.
What's changing?
From April 2008 the 10% tax band is being abolished, which means you will pay the basic rate of income tax on this band of earnings.
At the same time the basic rate of tax is falling from 22% to 20%.
How will this affect personal contributions to your SIPP/SSAS?
Personal contributions currently qualify for tax relief at the basic rate of 22%. This means that every £100 personal payment into your SIPP/SSAS costs you £78 and we reclaim £22 from the government which is paid into your pension fund.
Higher rate taxpayers can also reclaim a further 18% of the gross payment (£18 for every £100) at the end of the tax year by completing the relevant section on the self assessment tax return... Which means the net cost of a £100 pension payment for a higher rate taxpayer is only £60.
After 6th April 2008, the basic rate of income tax falls to 20%. A £100 pension payment will then cost £80 because the government will only be paying in £20 in basic tax relief. However, higher rate taxpayers will now be able to reclaim a further 20% tax relief at the end of the tax year. The true cost to a higher rate tax payer is will remain at £60.
Will this affect employer contributions?
No, if your employer/company makes payments to your pension fund, the amount they pay will not change.
What action do I need to take?
We always advise you to consult your independent financial adviser, who will apply these changes to your personal circumstance.
Things to consider
Now is a good time to review your pension payments and the changes to basic rate tax relief from 6 April 2008 may influence your decision on when to make personal contributions.
Basic rate taxpayers
Many of our SIPP and SSAS clients make annual personal contributions to their pension fund. If you are a basic rate tax payer you may want to consider making such payments before the 5 April 2008. A £10,000 gross payment made now will only cost £7,800 net of tax relief. After 5 April 2008 the net cost of the same £10,000 payment will rise by £200 to £8,000.
Higher rate taxpayers
Higher rate tax payers should remember to reclaim the extra 20% tax relief on your payments from the 2008/09 tax year onwards.
Third Party Payments
A third party payment is where you make a payment into a SIPP for someone else without it affecting your own personal tax situation. The tax relief currently added to the pension is 22%. (20% from 6 April 2008). Any additional tax relief due can be reclaimed by the third party on their self assessment tax return.
Even if the payments are made to a third party, say a child, who does not pay tax, they can still reclaim basic rate tax relief on gross payments up to £3,600 per tax year. So, before 5 April 2008 a net payment of £2,808 will be topped up by HMRC with £792 (22% tax relief) to make a gross payment into the pension fund of £3,600.
From 6 April 2008, you will need to make a net payment of £2,880 as HMRC will be topping up the reduced amount of £720 (basic rate tax 20%).
Please Note:
The information given here is based on our understanding of law and the changes due to be imposed by HM Revenue & Customs from 6 April 2008. Tax relief may alter and its value depends on your financial circumstances.
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