The government have changed the rules for pension contributions again, do you know what is happening?

You will have heard that the before the election the previous government was intending to limit the tax relief given on pension contributions for higher income taxpayers. The new government said it was going to review these rules as they thought they were too complex. The new rules were announced in mid October and apply from 2011/12.

The basic remains rule is that your personal pension contributions cannot exceed your £3,600 or your earnings, whichever is higher. For this purpose earnings are salary, bonus etc or profits from your own business.

There is then an ‘annual allowance’ which looks at the total contributions made by employee and employer – this limit is being reduced to £50,000. If you and your employer make contributions above this amount, you (personally) will be charged tax (at 20%, 40% or 50% depending on your income) on the excess. If you are a member of a defined benefit scheme HMRC look at the increase in the value of your accrued benefits to assess this £50,000 – this can be distorted if you are promoted and your salary increases significantly.

The lifetime allowance has also been reduced to £1.5m. If your ‘pension pot’ exceeds this amount when you start to take the benefits you will have to pay tax on the excess. This will be at 25% if you are taking income (the income is then taxable as you receive it) and 55% if you take a lump sum (no further tax).

Someone from HM Revenue & Customs has turned up on my office doorstep threatening ‘distraint’ for tax they say is unpaid. What does this mean?

Distraint is a process by which HMRC are able to take possession of and if necessary sell at auction goods to recover unpaid tax – it does not require a court order or judgement. To use this process the person visiting must be an HMRC officer, they cannot send a private bailiff. The normal process is that HMRC officer inspects and then lists the items which he intends to seize. Having done so he will want the taxpayer to agree to ‘walking possession’ whereby the goods are not removed and the taxpayer has time to make payment of the tax due, agree arrangements for the payment of the tax due or show that the tax is not actually due.

Your initial decision is whether to let the HMRC officer enter your premises – without a warrant he cannot break in. If it would show that you have nothing of value it may be worthwhile allowing this. However if you have valuable assets and the tax is not actually due, you may want to refuse entry while you take advice from your accountants and try to get HMRC records to show the corrected amount due, which may require the submission of outstanding returns. It is important that it is made very clear to the HMRC officer where assets are not owned by the taxpayer owing the debt.

Distraint is a serious process and it is important that you take immediate advice on your situation, particularly as the price obtained by HMRC if your goods are actually sold will usually be significantly less than the value you put on them.