As is probably now well-understood, those earning more than £150,000 a year are now, broadly, subject to a “Special Annual Allowance Charge” to Income Tax on pension contributions above £20,000 a year (a recent Treasury Bulletin states this will be raised to £30,000) where the contributions exceed a previously established pattern. Where this happens, the individual faces a 20% Income Tax charge under self-assessment. Actually, if the pension contributions are paid by a company, the tax rate is much higher than this, but there is a solution, as described below.

Our specialists say that the charge is higher than 20% because it is the individual who pays the tax and not the company or the pension scheme.

Therefore, the individual needs to retain sufficient post-tax income to enable him/her to pay the charge. In 2009/10, if an individual who is caught is entitled to £100 of corporate profits, the company can only pay £72.34 into a pension scheme – the balance of £27.66 is required to produce £14.47 after tax and National Insurance Contributions to deal with the charge of 20% on £72.34. In 2010/11, when the Income Tax rate will be 50%, the pension contribution reduces to £68.47 with £31.53 needed to produce £13.70 after tax.

The individual only receives the £27.66 or £31.53 temporarily – it eventually ends up with Revenue & Customs one way or another. Therefore, our specialists regard these amounts as tax charges. Compared to the amounts of the pension contributions, the rates are 38% in 2009/10 and 46% in 2010/11.

For people who are caught by these new rules, can we suggest that they look at pensions and other savings plans which are not regarded as “approved”.

This does not mean that they are in any way illegal, only that they do not fall within the special tax regime for approved pensions. Prior to “A Day”, FURBS (funded unapproved retirement pension schemes) were quite popular.

Contributions to them were subject to Income Tax and (possibly) National Insurance Contributions on the individuals for whom they were made, so they were taxed in much the same way as salaries. The main reasons they were popular were that:

* the FURBS funds could be invested to grow subject to Income Tax at

only the basic rate;

* the whole fund could be withdrawn at a suitable time entirely free

of tax; and

* the fund could be invested free of the restrictions imposed on

approved schemes.

Since A Day, FURBS have become unpopular because the sponsoring company no longer obtains Corporation Tax relief for contributions it makes until amounts are paid out as income, at which point in time, the individual is subject to Income Tax thereon. Also, it became somewhat easier and more tax-efficient to make contributions to approved schemes.

In our specialists’ view, that has all now changed. Even if Corporation Tax relief is not available, a “small” company will be able to make a contribution to a structure that does not adhere to approved pension scheme rules of £79 out of original profits of £100 and a large company £72. This gives greater retentions in the pension scheme for a high earner than in an approved pension scheme. The difficulty of Income Tax liabilities when amounts are paid to the individual can be overcome.

Actually, this route is often not even the best that can be achieved:

Because the structure our specialists’ use does not need to adhere to approved pension scheme rules, it can make loans to the employee for whom it is established and there are sometimes other ways in which he/she can benefit from funds in the structure before retirement.

In some circumstances, it is possible to use a structure which generates a Corporation Tax deduction for the sponsoring company, which increases the fund from £72 or £79 (or somewhere in between) to £100.

The structure can be established offshore which can provide further tax benefits for the ongoing growth of the funds invested.

Individual advice must be sought in all such cases.