Pre-Budget report: Government clamps down on pensions tax avoidance

Employers will no longer be able to circumvent tax rules for large contributions to an occupational pension scheme by routing them through another company, under measures announced in the pre-Budget report.

Organisations which make contributions to a registered pension scheme generally receive relief for this against their taxable profits. This is given for the chargeable period in which the contributions are paid. Where an employer’s contributions to a scheme exceed those made to the same scheme in the previous accounting period by 210%, tax relief on the amount which is in excess of 110% of the previous contribution may need to be spread over a period of up to four years.

The new rules, which take immediate effect, prevent employers by circumventing this by arranging for another employer to make part of the increase in a subsequent year, be this to the original scheme or to a substitute plan.†

The government will also issue legislation to clamp down on †people diverting tax-relieved pensions savings into inheritance using scheme pensions and lifetime annuities. This will now be subject to unauthorised payment tax charges of up to 70% and will take immediate effect for anyone surrendering benefits in this way to potentially enhance another member’s benefits.

Furthermore, the Finance Act 2008 will introduce similar measure if, in the event of a scheme member’s death who was receiving an a pension or annuity, the benefits of another scheme member who is connected to the deceased increase. For all deaths occurring on or after 6 April 2008, this will be treated as an unauthorised payment. If the deceased member or dependent is aged over 75 years, the increase in benefits may also be subject to inheritance tax.