Maximising Pension Tax Relief for High Earners

Maximising Pension Tax Relief for High Earners
Sarah Bradford discusses the Government’s rule change that from April 2011 higher rate tax relief for pension contributions made by high earners is to be restricted. 


From April 2011 relief is to be tapered away for those earning over £150,000 such that those with income of £180,000 and above will only receive basic rate relief on their pension contributions.


To prevent people rushing to take advantage of the tax relief whilst still available and making high levels of pension contributions in the run-up to April 2011, anti forestalling measures were introduced from 22 April 2009. The anti-forestalling measures take the form of a special annual allowance charge, which applies for 2009/10 and 2010/11 only.


Initially, the charge hit those whose income was £150,000 or higher, who change their regular pension savings and whose total pension savings exceed £20,000.


The aim was to remove the incentive to increase pension savings above a person’s normal contributions.


Pre-Budget Report

In the 2009 Pre-Budget Report, the Chancellor announced that in determining whether pension tax relief would be restricted from April 2011, the £150,000 threshold would now include pension contributions made by the employer. However, restrictions would not apply if the individual’s income, excluding employer contributions, is less than £130,000. Where relief is restricted, the restriction will apply to both employer and employee contributions.


As a result of these, from 9 December 2009, the special annual allowance charge was modified such that it now applies to individuals:


• whose incomes are £130,000 or over;
• who change their normal ongoing regular pension savings; and
• whose total pension savings in a tax year are more than £20,000 (or, if contributions are made less regularly than quarterly, the lower of £30,000 and the average contributions over the past three years.


Making the Most of the Tax Relief

Under the rules, regular annual pension savings are protected, along with increases in regular pension savings that do not take total pension savings for the year over the limit of £20,000 (or £30,000, as appropriate).


As regular pension savings are protected, those with regular savings in excess of £20,000 should, where possible, continue to make contributions up to the protected level. Thus, a person who has in previous years made regular monthly contributions of £5,000 (£60,000 a year) can continue to make contributions to that level and receive higher rate relief in both 2009/10 and 2010/11 without being hit with the special annual allowance charge. This is particularly worthwhile, particularly if the individual will fall within the 50% tax band from April 2010.


Likewise, a high earner can increase his or her pension savings to £20,000 without falling within the scope of the charge, even if he has made little or no pension contributions to date. Thus, a person contributing only £100 a month in 2008/09 to a pension scheme can increase his total contributions to £1,666 a month before the special annual allowance charge comes into play.


Many people make a one-off contribution, such as paying an annual bonus into a registered pension scheme. Under the rules as originally drafted, contributions made less than quarterly were not protected. However, from December 2009, this is no longer the case, so that a person who makes a regular contribution less than quarterly is protected to the lower of that contribution and £30,000. High earners making one-off contributions can continue to receive tax relief on contributions up to £30,000 provided average annual contributions in earlier years have been at least to this level.


Practical Tip

Although the door is closing on the amount of higher rate relief for pension contributions made by high earners, in spite of the special annual allowance charge, it is not yet closed. Opportunities remain to take advantage of higher rate relief, particularly for those who, historically, have made significant contributions. For those that can still afford to do so, this opportunity should not be missed.


Sarah Bradford