The Government drove another nail into the coffin of pension simplification with its Budget announcement that pensions tax relief was to be curtailed for those earning over £150,000 a year.
As from 6 April 2011, tax relief on pension contributions will be reduced to 20% for those with “relevant income” over £180,000 p.a. and relief will be tapered between 40% and 20% for those whose relevant income is between £150,000 and £180,000 p.a.. “Relevant income” for this purpose includes pension income, dividends, interest on most savings, rental and trust income.
There are special rules for the period between 22 April 2009 (Budget day) and 5 April 2011. These are designed to remove any advantage which might have been derived from increasing pension contributions before April 2011.
For individuals whose relevant income exceeded £150,000 p.a. in 2009/10 or either of the two preceding tax years, 40% tax relief on contributions will be confined to the greater of their current regular premiums which are paid at least quarterly (“protected pension input”) and £20,000 (the “Special Annual Allowance”).
Those with relevant income below £150,000 p.a. can continue to obtain higher rate relief on all contributions.
Current regular contributions of over £20,000 p.a. will be eligible for tax relief, but any single contribution or increase to a regular contribution which takes the total for the tax year to more than £20,000 will attract the 20% charge.
Those making annual contributions in particular may be caught by the new rules.
This reduction in tax relief for people with incomes over £150,000 p.a. is a major disincentive as from 6 April 2010 they may be paying income tax at 50% and only be able to claim pension relief at 20%.