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Pension premium shock ahead
The forthcoming changes to pension premium relief will have an impact on subsequent self-assessment payments on account.
In effect the introduction of basic rate relief at source will result in an increase in both balancing and payments on account whilst there is a transition to the new system. The problem will be that tax relief as premiums are paid will be overlooked by our clients whereas any increase to balancing payments will always come as a complete shock!
The following illustrates the concern:
Pension premium shock ahead
The forthcoming changes to pension premium relief will have an impact on subsequent self-assessment payments on account.
In effect the introduction of basic rate relief at source will result in an increase in both balancing and payments on account whilst there is a transition to the new system. The problem will be that tax relief as premiums are paid will be overlooked by our clients whereas any increase to balancing payments will always come as a complete shock!
The following illustrates the concern:
Harry pays £18,000 as personal pension contributions, on a monthly basis, in 2000-2001. His 2000-2001 tax liability, assuming he is a higher rate taxpayer is reduced by £7,200 (£18,000 at 40 per cent) with the result that his 2001-2002 payments on account are each reduced by £3,600.
On 6 April 2001 his monthly premiums are reduced by basic rate tax with each £1,500 monthly payment becoming £1,170. Once his tax return to 5 April 2002 is completed, Harry's balancing payment on 31 January 2003 will include £3,960 being the deferral from 2000-2001 of £7,200 less higher rate relief on the personal pension payments made in 2001-2002 (£18,000 at 18 per cent = £3,240).
It does not end there. Each payment on account for 2002-2003 will also be higher by 50 per cent of the increased balancing payment. Thus Harry, assuming his profits have not varied over the years, has to find £5,940 (£3,960 + 50 per cent x £3,960) on 31 January 2003 in addition to the tax payments he is used to paying. By 31 January 2003 Harry has recovered £6,930 in basic rate relief (21 months x £330) so is not out of pocket, but how many clients will see it this way?
The position would be worse for anyone who pays their premiums late in the tax year. If instead of monthly premiums Harry paid his £18,000 in March, then by 31 January 2003 he has only made one payment of £18,000, net of tax, and will thus have recovered only £3,960 to set against the extra tax of £5,940.
We need to spell out to our clients how these tax changes affect not only the basis upon which tax relief is given but also how they will impact upon the payment of tax.
Paul Seal FCA, FTII, TEP,
Howes Percival,
Norwich.
