Restricted tax relief on pension contributions

Pension contributions made by an individual are usually paid net of basic rate tax. Where the individual is a higher rate taxpayer further relief is due which significantly reduces the net cost of the contribution.

The government has announced its intention to restrict tax relief on pension savings with effect from 6 April 2011 for people with taxable income of £150,000 or more. The relief will be tapered down until it is 20%.

Legislation will be introduced to prevent those potentially affected by the new rules from seeking to forestall this change by increasing their pension savings in excess of their normal regular pattern, prior to that restriction taking effect.

The forestalling measures will apply to individuals with incomes of £150,000 or more who, from Budget Day, change:

• their normal pattern of regular pension contributions, or
• the normal way in which their pension benefits are accrued, and
• their total pension contributions or benefits accrued exceed £20,000 a year.

Reacting to the Chancellor’s Budget speech, Richard Lambert, CBI Director-General, said:

‘Changing the higher-rate tax relief on pensions weakens incentives to save for retirement and is yet another change to a system which really needs stability.’