People with high incomes will cease to benefit from higher rate tax relief on pension contributions after 5 April 2011, and 40% relief will be restricted in the tax years 2009/10 and 2010/11.
The Government has produced a consultation paper setting out the proposed rules that will apply in the longer term as well as tightening up on the so-called antiforestalling rules that apply now.
After 5 April 2011, the big dividing point for income will be £130,000 – and that’s income from all sources. If your pre-tax income is less than this amount, the new rules will not apply to you even if your employer makes a very substantial contribution to your pension scheme.
If your income is £130,000 or more, then you will potentially come into the rules, because the value of your employer’s contributions to your pension scheme will be included in the definition of income. If your income including employer pension contributions is £150,000 or more, then HMRC will taper the amount of 40% or 50% higher rate tax relief that you receive.
If your income is £180,000 or above, then you will only receive 20% basic rate tax relief on all of your pension contributions. The reduction in the tax relief will be made by a special charge on you personally.
The current anti-forestalling rules for 2009/10 and 2010/11 have been amended so that a £130,000 threshold has also applied from 9 December 2009. The rules apply if the limit is exceeded in the year of the contribution or in either of the two preceding years.
It is possible to make limited pension contributions regardless of your income that qualify for full higher rate tax relief. The amount that can be invested in this way is at least £20,000 but could be more depending on your circumstances. It will make sense to contribute as much as possible while you are still able to get full tax relief. Pension contributions that qualify for just 20% basic rate tax relief will be significantly less attractive.
For some people the challenge will be to keep their income below the £130,000 (or £150,000) threshold without affecting their standard of living too much.
