Some high earners could benefit from new pensions tax relief rules

People who earn more than £150,000 will get 50 per cent tax relief on the contributions they make to their pensions for one year.

The Budget introduced a new 50 per cent income tax rate for anyone on more than £150,000 annually as from April 2010 and restricted the relief that top-rate taxpayers can claim on the contributions they make to their pensions.

However, the restrictions do not come into effect until April 2011, which means that those paying at the new income tax rate of 50 per cent from April 2010 will gain from 50 per cent tax relief on any contributions they make to their pensions. For one tax year only, each pound paid into their pensions will save 50p in tax.

People earning between £150,000 and £160,000 a year may also continue to benefit after April 2011. This is because the Treasury has confirmed that the tax relief on a high-earning employee’s pension contributions is to be based on the new 50 per cent rate and not, as had been originally thought, on the current top rate of 40 per cent.

A Treasury spokesman said: “It is possible that those on incomes, as measured for the restriction of pensions tax relief, of between £150,000 and £160,000 will receive tax relief of more than 40 per cent on their pension contributions as a result of paying 50 per cent tax on their income over £150,000.

“The government is consulting on the implementation of this measure in the summer, and, as with the anti-forestalling measure already announced, will seek to ensure that the measure of income cannot be manipulated by the use of salary sacrifice schemes.”

But people earning £180,000 could see their pension tax charges increase further in 2011.

A detail in the Budget announcement has already revealed that people who earn more than £150,000 a year will have to pay tax on employer contributions to their company pension schemes.

The Treasury has said that employers’ contributions for top-rate taxpayers are to be taxed as benefits in kind as from April 2011.

It was believed that the ceiling for such a tax charge would be 20 per cent. But the amount could rise to 30 per cent depending on the earnings of the individual concerned.

The decision to restrict income tax relief on pensions contributions for high earners means that anyone earning over £150,000 will see their relief reduced on a tiered basis from the new 50 per cent rate until the relief reaches 20 per cent, the same as basic rate income taxpayers, for those earning £180,000 annually. They will also see the amount of tax paid on employers’ contributions rise correspondingly.

Income tax pension relief for individuals will taper at a rate of 1 per cent for every extra £1,000 earned above £150,000. This means that a person earning £150,000 a year will get 50 per cent relief on their own pension contributions and pay no tax on their employer’s pension contributions.

Earning £160,000 a year will mean income tax relief of 40 per cent but a charge of 10 per cent on employer contributions (the gap between the relief rate and the new income tax rate).

Anyone on £180,000 a year will receive income tax relief on their own pension contributions of 20 per cent and will pay 30 per cent on their employer’s contributions (the gap between the relief rate and the new income tax rate).

The issue has been further complicated by the difference between final salary and money purchase pension schemes.

Final salary schemes are based on how much a member earns rather than just on the value of the contributions made by themselves or their employers.

The Treasury has conceded that there are differences between the two types of pension scheme and said that the changes are to go out to consultation.

A spokesman commented: “Our aim is to be fair to both, and we are consulting on how to do that.”