Finance Bill

House of Commons

Session 2008 - 09
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Finance Bill

Finance Bill
Schedule 35 — Pensions: special annual allowance charge
279

Schedule 35
Section 71

Pensions: special annual allowance charge
Special annual allowance charge
1     (1)
A charge to income tax, to be known as the special annual allowance charge,
arises where—
5
(a)
the total adjusted pension input amount for a tax year in the case of
a high-income individual who is a member of one or more registered
pension schemes, exceeds
(b)
the amount of the special annual allowance.
      (2)
The individual is a high-income individual if the individual’s relevant
10
income for the tax year is £150,000 or more.

Paragraph 2 makes provision for calculating the individual’s relevant
income.
      (3)
Paragraphs 3 to 16 explain what is the total adjusted pension input amount.
      (4)
The special annual allowance is £20,000.
15
      (5)
But if, in calculating the total adjusted pension input amount of the
individual for the tax year, a deduction is made in respect of—
(a)
protected pension input amounts (see paragraphs 7 to 14), or
(b)
a pre-22 April 2009 pension input amount that is such an amount by
virtue of paragraph 16(3),
20

(or both) the special annual allowance is £20,000 less the amount of the
deduction or, if the deduction is £20,000 or more, is nil.
      (6)
The person liable to the special annual allowance charge is the individual.
      (7)
The individual is liable to the special annual allowance charge whether or
not—
25
(a)
the individual, and
(b)
the scheme administrator of the pension scheme or schemes
concerned,

are UK resident, ordinarily UK resident or domiciled in the United
Kingdom.
30
      (8)
The special annual allowance charge is a charge at the rate of 20% in respect
of the amount by which—
(a)
the total adjusted pension input amount, exceeds
(b)
the amount of the special annual allowance.
      (9)
But where—
35
(a)
the individual’s total pension input amount under section 229 of FA
2004 (annual allowance charge) for the tax year, exceeds
(b)
the amount of the annual allowance for the tax year (see section 228
of that Act and orders made under it),

the amount in respect of which the special annual allowance charge is
40
charged is reduced by the amount of the excess.
     (10)
In calculating the individual’s liability to income tax for the tax year the
amount of any income tax to which the individual is liable under this section

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Schedule 35 — Pensions: special annual allowance charge
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is to be added at Step 7 of the calculation in section 23 of ITA 2007 (which
applies as if this Schedule were a provision listed in section 30 of that Act).
     (11)
The amount in respect of which the special annual allowance charge is
charged is not to be treated as income for any purpose of the Tax Acts.
Calculation of relevant income
5
2     (1)
To find the individual’s relevant income for the tax year take the following
steps—

Step 1

Identify the individual’s total income.

Step 2
10

Add the amount of any deductions made from any employment income of
the individual for the tax year under section 193(2) of FA 2004 or made under
Chapter 2 of Part 5 of ITEPA 2003 in accordance with paragraph 51 of
Schedule 36 to FA 2004.

Step 3
15

Deduct the amount of any relief under the provisions listed in section 24 of
ITA 2007, other than sections 193(4) and 194(1) of FA 2004, to which the
individual is entitled for the tax year.

Step 4

Deduct the aggregate amount of any relevant contributions, but subject to a
20
maximum of £20,000.

Step 5

Add any amount by which what would otherwise be general earnings or
specific employment income of the individual for the tax year has been
reduced by a post-22 April 2009 salary sacrifice scheme.
25

Step 6

If in the tax year the individual makes, or is treated under section 426 of ITA
2007 as making, a gift that is a qualifying donation for the purposes of
Chapter 2 of Part 8 of that Act (gift aid), deduct the grossed up amount of the
gift (that is, the amount of the gift grossed up by reference to the basic rate
30
for the tax year).

The result is the individual’s relevant income for the tax year unless the
result is less than £150,000 and the following provisions provide that the
individual’s relevant income is to be a different amount.
      (2)
If the amount arrived at under sub-paragraph (1) is less than £150,000, take
35
the steps in that sub-paragraph in relation to—
(a)
the tax year before the tax year concerned, and
(b)
the tax year before that.

If the result is £150,000 or more for either or both of those earlier tax years
the individual’s relevant income for the tax year is to be assumed to be
40
£150,000.
      (3)
If there is a scheme the main purpose, or one of the main purposes, of which
is to secure that the individual’s relevant income for the tax year is less than
£150,000, it is to be assumed to be £150,000.
      (4)
In step 4 in sub-paragraph (1) “relevant contributions” are—
45
(a)
contributions which are relievable pension contributions in relation
to the individual and are paid in the tax year,

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Schedule 35 — Pensions: special annual allowance charge
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(b)
contributions in respect of which the individual is entitled to a tax
reduction under section 788 of ICTA and which are paid in the tax
year, and
(c)
contributions paid by the individual for which a deduction is given
under Chapter 2 of Part 5 of ITEPA 2003 for the tax year in
5
accordance with paragraph 51 of Schedule 36 to FA 2004.
      (5)
In step 5 in sub-paragraph (1) “a post-22 April 2009 salary sacrifice scheme”
is a scheme made on or after 22 April 2009 in pursuance of which—
(a)
the individual gives up the right to receive general earnings or
specific employment income, and
10
(b)
an employer of the individual or any other person agrees to pay
contributions (or additional contributions) to a pension scheme in
respect of the individual or otherwise to secure an increase in the
amount of benefits to which the individual or any person who is a
dependant of, or is connected with, the individual is actually or
15
prospectively entitled under a pension scheme.
      (6)
Section 993 of ITA 2007 (meaning of “connected” person) applies for the
purposes of sub-paragraph (5).
Total adjusted pension input amount: general
3     (1)
The total adjusted pension input amount is to be calculated as follows.
20
      (2)
Arrive at an amount in the same way as the total pension input amount
would be arrived at for the purposes of the annual allowance charge in
accordance with sections 229 to 237 of FA 2004 (assuming that it were
necessary to arrive at it for that purpose) but subject to—
(a)
the modifications of those sections specified in paragraphs 4 and 5,
25
and
(b)
where paragraph 6 applies, the provisions of that paragraph.
      (3)
Then reduce the amount so arrived at by the aggregate of—
(a)
any protected pension input amounts (see paragraphs 7 to 14), and
(b)
any relevant refunded amounts (see paragraph 15),
30

and, if the tax year is the tax year 2009-10, any pre-22 April 2009 pension
input amount (see paragraph 16).
Total adjusted pension input amount: modifications of sections 229 to 237 of FA 2004
4     (1)
Section 229(3) of FA 2004 (no pension input amount for year in which
individual becomes entitled to all benefits under arrangement or dies) has
35
effect for arriving at an amount under paragraph 3(2) in relation to an
arrangement only if condition A or B is met.
      (2)
Condition A is that—
(a)
the arrangement is a defined benefits arrangement under a pension
scheme,
40
(b)
at the time when the individual becomes entitled to all the benefits
that may be provided to the individual under the arrangement or
dies, there are at least 20 persons in respect of whom defined benefits
arrangements subsist under the pension scheme under which
benefits are accruing or scheme pensions are being paid, and
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(c)
the individual’s becoming entitled to any of the benefits that may be
provided to or in respect of the individual under the arrangement is
not part of a scheme the main purpose, or one of the main purposes,
of which is to avoid or reduce liability to the special annual
allowance charge, the annual allowance charge or the lifetime
5
allowance charge.
      (3)
Condition B is that—
(a)
the arrangement is under an occupational pension scheme, a public
service pension scheme or a group personal pension scheme,
(b)
the individual’s entitlement to the benefits mentioned in section
10
229(3)(a) of FA 2004 arises only because the ill-health condition is
satisfied, and
(c)
the individual’s becoming entitled to any of the benefits that may be
provided to or in respect of the individual under the arrangement is
not part of a scheme the main purpose, or one of the main purposes,
15
of which is to avoid or reduce liability to the special annual
allowance charge, the annual allowance charge or the lifetime
allowance charge.
5     (1)
Sections 230(1), 233(1) and 234(1) of FA 2004 have effect for arriving at an
amount under paragraph 3(2) as if “the pension input period of the
20
arrangement that ends in” were omitted.
      (2)
Sections 230 to 237 of FA 2004 have effect for arriving at an amount under
paragraph 3(2) as if “tax year” were substituted for “pension input period”
in all other places.
Total adjusted pension input amount: modification in cases of avoidance scheme
25
6     (1)
This paragraph applies if there is a scheme the main purpose, or one of the
main purposes, of which is to avoid or reduce liability to the special annual
allowance charge, the annual allowance charge or the lifetime allowance
charge by reducing the amount arrived at in accordance with paragraph 3(2)
in relation to an arrangement under a pension scheme for the tax year (or for
30
reducing that amount and the amount so arrived at for other tax years).
      (2)
If the amount calculated under sub-paragraph (3) exceeds that arrived at in
accordance with paragraph 3(2) in relation to the arrangement for the tax
year, the amount so calculated is to be treated as if it were the amount so
arrived at.
35
      (3)
The amount is calculated by deducting—
(a)
the amount of the consideration that might be expected to be
received in respect of an assignment (or assignation) of the benefits
to which the individual or any dependant of the individual has a
prospective entitlement under the arrangement at the beginning of
40
the tax year, from
(b)
the amount of the consideration that might be expected to be
received in respect of an assignment (or assignation) of the benefits
to which the individual or any dependant of the individual has a
prospective entitlement under the arrangement at the end of the tax
45
year.
      (4)
That calculation is to be made on the assumptions that—
(a)
the benefits are capable of assignment (or assignation),

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Schedule 35 — Pensions: special annual allowance charge
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(b)
the assignment (or assignation) is by a transaction between parties at
arm’s length, and
(c)
any power to reduce entitlement to the benefits does not exist.
      (5)
If the arrangement ceases to exist during the tax year, the reference in sub-
paragraph (3)(b) to the end of the tax year is to the time immediately before
5
it ceases to exist.
      (6)
Section 236 of FA 2004 applies for adjusting the amount in sub-paragraph
(3)(b) as for adjusting the closing value of an individual’s rights as calculated
under section 234(5) of that Act (but as if references to the pension input
period were to the tax year and whether or not the arrangement is a defined
10
benefits arrangement).
Protected pension input amounts: general
7     (1)
The following paragraphs make provision for protected pension input
amounts in respect of arrangements under registered pension schemes—
(a)
paragraph 8 makes provision about existing defined benefits
15
arrangements,
(b)
paragraph 9 makes provision about existing cash balance
arrangements,
(c)
paragraph 10 makes provision about other existing money purchase
arrangements under occupational pension schemes and public
20
service pension schemes,
(d)
paragraph 11 makes provision about other existing money purchase
arrangements under other schemes,
(e)
paragraph 12 makes provision about existing hybrid arrangements,
and
25
(f)
paragraph 13 makes provision about new and re-activated
arrangements.
      (2)
Paragraph 14 makes anti-avoidance provision in relation to all the varieties
of arrangements covered by paragraphs 8 to 13.
Protected pension input amounts: existing defined benefits arrangements
30
8     (1)
This paragraph applies in respect of a defined benefits arrangement if the
arrangement is under an occupational pension scheme or a public service
pension scheme.
      (2)
If the individual pays relevant added years contributions under the
arrangement in the tax year, the amount arrived at under paragraph 3(2) in
35
relation to the arrangement is a protected pension input amount to the
extent that it is attributable to those contributions.
      (3)
Relevant added years contributions are contributions paid—
(a)
with a view to securing that the calculation of benefits under the
arrangement is by reference to a period of service in excess of
40
pensionable service by the individual,
(b)
in pursuance of an agreement which was made before noon on 22
April 2009 or made pursuant to a written application received by or
on behalf of the scheme administrator of the pension scheme before
that time,
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(c)
on a quarterly or more frequent basis during the period beginning
with that date or (if later) when they first became payable and ending
with the relevant end date without any failure to pay contributions
payable during that period on more than an insignificant number of
occasions, and
5
(d)
at a rate which has not increased during that period otherwise than
in accordance with an agreement made before noon on 22 April 2009
or made pursuant to a written application received by or on behalf of
the scheme administrator of the pension scheme before that time.
      (4)
To the extent that the amount arrived at under paragraph 3(2) in relation to
10
the arrangement is attributable otherwise than to the paying of relevant
added years contributions it is a protected pension input amount if—
(a)
benefits have been accruing to or in respect of the individual under
the arrangement since before 22 April 2009 and until the relevant end
date, and
15
(b)
there is no material change in the rules of the pension scheme under
which benefits to or in respect of the individual are calculated under
the arrangement in the period beginning with 22 April 2009 and
ending with the relevant end date.
      (5)
If there is a material change in the rules of the pension scheme under which
20
such benefits are calculated under the arrangement in that period, the
amount so arrived at, to the extent that it is so attributable, is a protected
pension input amount to the extent that it is not attributable to that change.
      (6)
But even in that case the whole of the amount so arrived at, to the extent that
it is so attributable, is a protected pension input amount if the material
25
change affects at least 50 active members of the pension scheme.
      (7)
In this paragraph “the relevant end date” means the end of the tax year or, if
earlier, the time when benefits cease to accrue to or in respect of the
individual under the arrangement.
Protected pension input amounts: existing cash balance arrangements
30
9     (1)
This paragraph applies in respect of a cash balance arrangement if the
arrangement is under an occupational pension scheme or a public service
pension scheme.
      (2)
If the individual pays relevant additional voluntary contributions under the
arrangement in the tax year, the amount arrived at under paragraph 3(2) in
35
relation to the arrangement is a protected pension input amount to the
extent that it is attributable to those contributions.
      (3)
Relevant additional voluntary contributions are additional voluntary
contributions paid—
(a)
in pursuance of an agreement which was made before noon on 22
40
April 2009 or made pursuant to a written application received by or
on behalf of the scheme administrator of the pension scheme before
that time,
(b)
on a quarterly or more frequent basis during the period beginning
with that date or (if later) when they first became payable and ending
45
with the relevant end date without any failure to pay contributions
payable during that period on more than an insignificant number of
occasions, and

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285

(c)
at a rate which has not increased during that period otherwise than
in accordance with an agreement made before noon on 22 April 2009
or made pursuant to a written application received by or on behalf of
the scheme administrator of the pension scheme before that time.
      (4)
To the extent that the amount arrived at under paragraph 3(2) in relation to
5
the arrangement is attributable otherwise than to the paying of relevant
additional voluntary contributions it is a protected pension input amount
if—
(a)
benefits have been accruing to or in respect of the individual under
the arrangement since before 22 April 2009 until the relevant end
10
date, and
(b)
there is no material change in the rules of the pension scheme under
which benefits to or in respect of the individual are calculated under
the arrangement in the period beginning with 22 April 2009 and
ending with the relevant end date.
15
      (5)
If there is a material change in the rules of the pension scheme under which
such benefits are calculated under the arrangement in that period, the
amount so arrived at, to the extent that it is so attributable, is a protected
pension input amount to the extent that it is not attributable to that change.
      (6)
But even in that case the whole of the amount so arrived at, to the extent that
20
it is so attributable, is a protected pension input amount if the material
change affects at least 50 active members of the pension scheme.
      (7)
In this paragraph “the relevant end date” means the end of the tax year or, if
earlier, the time when benefits cease to accrue to or in respect of the
individual under the arrangement.
25
Protected pension input amounts: other existing money purchase arrangements under
occupational and public service pension schemes
10    (1)
This paragraph applies in respect of a money purchase arrangement, other
than a cash balance arrangement, if the arrangement is under an
occupational pension scheme or a public service pension scheme or forms
30
part of a group personal pension scheme.
      (2)
If the individual pays relevant additional voluntary contributions under the
arrangement in the tax year, the amount arrived at under paragraph 3(2) in
relation to the arrangement is a protected pension input amount to the
extent that it is attributable to those contributions.
35
      (3)
Relevant additional voluntary contributions are additional voluntary
contributions paid—
(a)
in pursuance of an agreement which was made before noon on 22
April 2009 or made pursuant to a written application received by or
on behalf of the scheme administrator of the pension scheme before
40
that time,
(b)
on a quarterly or more frequent basis during the period beginning
with that date of (if later) when they first became payable and ending
with the relevant end date without any failure to pay contributions
payable during that period on more than an insignificant number of
45
occasions, and
(c)
at a rate which has not increased during that period otherwise than
in accordance with an agreement made before noon on 22 April 2009