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Pensions Update: Pension tax relief for higher rate tax payers has been cut

Clearly, higher earners will need to increase their contributions to maintain the same level of gross funding.

Simon Taylor, Pensions Specialist
Pearson Hinchliffe

Pearson Hinchliffe’s pensions specialist, Simon Taylor outlines the changes.

The recent budget announced that from 6 April 2011, tax relief on pension contributions would be restricted for people earning more than £150,000. From April 2011 tax relief will be reduced on a tapered basis from 40% to the standard rate of 20% - the same as that for a basic rate taxpayer - until taxable income reaches £180,000.

To prevent individuals from increasing their regular pension contributions prior to 6 April 2011, a special annual allowance and associated tax charge has been introduced for 2009/10 and 2010/11.

Any additional pension contributions above the special annual allowance of £20,000 will be subject to a tax charge of 20% in 2009/10 (expected to be 30% in 2010/11 to coincide with the new 50% tax band) which will have the effect of restricting the tax relief to basic rate. This associated tax charge will not apply to any normal ongoing regular pension contributions in excess of £20,000 that were already in place before 22 April 2009.

Both the annual allowance and the standard lifetime allowance will also be frozen for five years from 6 April 2010, fixing them at £255,000 and £1.8 million respectively.

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