Budget 2009: Tax relief on pensions for high-earners to be reduced

Higher-rate tax relief on pension contributions for those earning more than £150,000 a year will be restricted from April 2011.

In his Budget speech, Chancellor Alastair Darling announced that the 40% higher rate of tax relief will gradually taper down to the basic rate of 20% for those on incomes over £180,000. The restriction applies to all contributions, but employers will continue to receive full relief on their contributions into employees’ pension through corporation tax and national insurance contributions.

Darling said: “I intend to address an anomaly which sees a tiny proportion at the top take a large slice of the help we give people to help them save. It is difficult to justify that a quarter of all the money the country spends on tax relief on pensions goes as to the top 1.5% of earners. I believe it is fair that those who have gained the most should contribute more.”

Legislation will be introduced in the Finance Bill 2009 to prevent those potentially affected from seeking to forestall this change by increasing their pensions savings in excess of their normal pattern, prior to the restriction coming into effect.

Individuals who increase their pension savings on, or after, the date of the proposed change over and above their normal pattern of regular pension savings will be affected only if their total pension savings in that year are over £20,000.

Clive Grimley, partner at Barnett Waddingham, said the move will not affect new contracts of employment for higher earners, but it will apply higher taxes and limit tax relief on pension contributions of current highly-paid employees. “It will prevent those employees gaining the tax advantages offered by sacrificing salary or bonus in favour of a higher employer paid pension contribution. Politically this may be a good time to restrict higher rate tax relief due to public concern that high earners are receiving substantial rewards and benefits.

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“However as the Chancellor has applied this measure only to higher earners it seems to amount to an implicit endorsement that salary or bonus sacrifice remains effective for the vast majority of employees who earn under £150,000,” he said.

Martin Palmer, head of corporate pensions marketing at Friends Provident, said any ‘attack’ on pension tax relief could send the wrong message to both scheme members and employers: “This could be a dangerous trend if the government does nothing to re-rate the earnings level each year. The administration of this tapering away of tax relief will increase complexity and the cost of running pension schemes for limited benefit to the Exchequer.”