The taxman has confirmed guidelines for high earners who face the 20% special allowance tax charge on contributions to a UK pension by publishing new information on the HM revenue and Customs web site.
The special allowance is a tax penalty for anyone earning £150,000 or more who inputs more than £20,000 in to a UK pension.
The full details of the tax charge are in a new chapter added to HMRC’s online pensions manual for tax inspectors.
QROPS exempt from special allowance tax charge
QROPS are not affected by special allowance rules because the funds do not attract any UK tax relief.
The problem for many high earners is that the calculation considers total income – not just income from working.
This means a lot of taxpayers who do not earn £150,000 on their payslips are affected by the special allowance rule that reduces pensions.
Total income includes:
- Earnings from employment
- Earnings from self-employment and partnerships
- Most pensions income
- Interest on most savings
- Income from shares
- Rental income
- Income received from a trust.
Earnings from employment include the cash value of company cars, private health, cheap loans and other benefits included on a P11d return.
QROPS transfer can wipe out special allowance tax charge
The allowance was announced by Chancellor Alistair Darling in last year’s budget and is an anti-avoidance rule to stop high earners benefitting from top rate tax relief to bolster their pensions.
Any higher rate taxpayers who are living overseas or are planning to retire abroad can wipe out the special allowance charge by transferring their pension funds in to a QROPS.
To find out how the special allowance affects pensions is a six-step process to calculate relevant pension earnings – if the figures top £150,000, the taxpayer is caught in the special allowance rules, if not, the rules do not apply.
QROPS.net can help taxpayers thinking about a QROPS pension transfer who want to know the full extent of their special allowance liability. As a leading QROPS transfer specialist, we can also advise on the most suitable QROPS tailored to individual financial circumstances.
