Changes to tax relief on pension contributions

The Chancellor announced significant changes to relief on pension contributions in his budget on 22 April 2009. As well as introducing a 50% tax rate from April 2010 for taxable income above £150,000, the Chancellor has also announced that higher rate tax relief will be withdrawn on pension contributions for taxpayers with income over £150,000 with effect from April 2011.

The government has since announced some changes to the anti-forestalling rules set out in the Finance Bill which aim to prevent high earners from gaining higher rate relief by making large increases to their pension contributions between April 2009 and April 2011 when the restrictions come into force. If the amendments are agreed by parliament, many taxpayers who currently pay premiums on an annual or irregular basis will be allowed to benefit from higher rate tax relief on contributions of up to £30,000, in line with those who make more regular contributions.

This is a piece of complex legislation with potential pitfalls regarding the treatment of annual or irregular employer contributions, which may give rise to an unexpected tax bill for the director or employer.

If you are considering making an employer or employee pension contribution, even if your income is below £150,000, then you should consult your tax or financial adviser for specific guidance on whether or not you will be affected.

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