Pre-Budget Report: Restricting Pension Tax Relief for High-Income Individuals

In the 2009 Budget earlier this year, measures were announced to come into effect from 6th April 2011 to phase out higher rate income tax relief for pension contributions where a person’s income is above £150,000. At the same time as this announcement there were anti-forestalling measures introduced to stop people who had earned more than £150,000 in any of the last three years topping up their pension scheme in the time leading up to 6th April 2011.

In the Pre-Budget Report, the Chancellor extended the anti-forestalling measures by lowering the income threshold for these rules applying from £150,000 to £130,000. At the same time, the definition of income will now include employer pension contributions. This means that, unless there is a regular (meaning quarterly or more frequently) pattern of making pension contributions, anyone earning more than £130,000 and making pension contributions in excess of £20,000 (or £30,000 in some circumstances) will be charged additional tax in respect of the excess contributions.

Comment: This is a further attack on higher rate income tax relief on pension contributions and is making a complicated area even more complex. As before, this measure has been introduced with no warning, so is certain to catch people unaware. If your earnings are above £130,000 your pension arrangements will need to be reviewed as a matter of urgency as making contributions could result in a tax charge.