High earners are walking a tightrope over grab for pensions

Published on Friday 1 May 2009 21:33

RUMOURS were rife even before the Chancellor rose to deliver his Budget speech last week that pension tax relief would take a direct hit. In the event, he reserved the bad news for those with income over £150,000 .

From April 2011, anyone with income above 180,000 will only get tax relief on personal contributions at the basic rate of 20 per cent, while those with income between 150,000 and 180,000 will receive a rate somewhere in between higher and basic. Significantly, employer contributions for this group are to be taxed as a benefit-in-kind on the individual.

While a lot of uncertainty exists around what we face in 2011, new pension tax rules for the current and next tax year were also unveiled. These prevent a buy-now-while-stocks-last opportunity for high earners.

Where income exceeds 150,000, tax relief on pension contributions at the higher rate of 40 per cent will be limited to the first 20,000 of contributions. This 20,000 limit comprises the value of personal and employer contributions added together.

There are two exceptions to this rule.

Firstly, any existing regular contributions – defined as quarterly or more frequent – will continue to attract 40 per cent tax relief even if they add up to more than 20,000 over the year. For example, someone paying 3,000 a month into their pension will continue to get 40 per cent tax relief.

Additionally, contributions that increase in line with earnings or at a fixed annual rate are also exempt.

If contributions in the tax years 2009-10 and 2010-11 exceed 20,000 these will only attract tax relief at 20 per cent. Those considering paying in one-off contributions should carefully consider whether the lower rate of tax relief still makes it worthwhile. The changes do not affect the majority of pension savers, who can continue their pension provision as normal. Those with income of less than 150,000 can continue to pay in personal contributions up to 100 per cent of earnings and get up to 40 per cent tax relief.

Indeed, those earning over 100,000 but less than 150,000 have a great opportunity to gain tax relief of up to 61 per cent on their pension contributions.

From April 2010, the personal tax allowance will reduce at a rate of 1 for every 2 of income over 100,000, as explained on page 38. So, anyone earning mote than about 113,000 will lose his or her whole allowance. However, by entering into an agreement with your employer to "sacrifice" part of your earnings, it is possible to keep your personal allowance intact. Combined with 40 per cent tax relief and national insurance savings of 1 per cent, this makes a marginal tax saving of 61 per cent.

• John Lawson is head of pensions policy at Standard Life