Pension Taxation Overhauled - International Law Office

The taxation of pensions in the Isle of Man has recently undergone a major overhaul with the enactment of the Income Tax (Pensions) Act 2008, which provides for significant amendments to the Income Tax (Retirement Benefit Schemes) Act 1978 and the Income Tax Acts 1970 and 1989.

The new act repeals the percentage-based approach to contributions and rules dealing with the carry-forward of unutilized relief and the carry-back of contributions. Instead, the concept of an annual allowance will be introduced. The act provides that the annual allowance will start at £300,000. Tax relief will be available on contributions, into all approved schemes, up to the annual allowance, provided that there are sufficient relevant earnings in the tax year. If relevant earnings are lower than the annual allowance, tax relief will be limited to 100% of those earnings.

Pension contributions paid in the tax year ended April 5 2008 were subject to the current pension rules. Pension contributions made on or after April 6 2008 are subject to the new legislation (ie, the annual allowance of £300,000, subject to the availability of relevant earnings).

The Income Tax Act 1989 currently allows a member to claim unused relief for a period up to six years and, subject to a prescribed time limit, to elect for a contribution to be treated as if the payment were made in an earlier year of assessment. The new act will repeal provisions in Sections 15 and 16 of the 1989 act, limiting future contributions based on relevant earnings and the new annual allowance.

Recognizing the fact that contributions made during 2007/2008 may have been determined based on the existing carry-forward and carry-back rules, the assessor allowed premiums paid in 2007/2008 to be treated as paid in an earlier year, provided that the election was made by July 5 2008 (the latest date previously available under Section 15 of the 1989 act).

The repeal of Sections 15 and 16 affects only personal pension schemes approved under Part 1 of the 1989 act. The repeal does not impact on contributions to occupational schemes approved under the Income Tax Act 1978.

The ability to carry back contributions does not include contributions paid during 2008/2009. Contributions made after April 6 2008 will be considered in line with the new annual allowance approach.

On June 19 2007 the Tynwald (parliament) approved a Treasury concession (Government Circular 21/07) allowing pension trustees to pay a trivial commutation lump sum up to a limit of £16,000 in cases where the member wished to ‘cash in’ a pension fund or was unable to acquire a suitable pension (eg, annuity) due to the small fund available.

With effect from April 6 2008 the trivial commutation lump-sum limit shall be increased to £16,500 in line with the amount set by Her Majesty's Revenue and Customs. However, this concession will be replaced by regulations which are currently going through the Tynwald.

For further information on this topic please contact Christopher J Murphy by telephone (+44 1624 695800) or by fax (+44 1624 695801) or by email (cjm@mannandpartners.com).