Pension tax relief hits the buffers
Autumn 2009
People with relatively high incomes could find that tax relief on part of their pension contributions is effectively restricted to just 20% this year. You will not be affected unless your income from all sources, including investments, is at least £150,000.
The restrictions apply to individual and employer pension contributions into any registered pension scheme ranging from personal pensions to final salary-related schemes. The excess higher rate tax relief (but not basic rate relief) is taken away through a special tax charge on you personally.
The rules were introduced in the Finance Act 2009 and will be replaced from 2011/12. For the tax years 2009/10 and 2010/11, people with incomes of at least £150,000 can still benefit from full tax relief on limited levels of contributions. The rules are complicated. Quarterly or more frequent contributions started before 22 April 2009 are basically unaffected and there is a special annual allowance of at least £20,000, which can be higher in certain circumstances. Ask us for details if you think you might be affected now or in the future.
From 2011/12, the restrictions on tax relief are due to be generally tighter. For incomes of at least £180,000, the tax relief for all pension contributions will be at basic rate only. For incomes between £150,000 and £180,000, tax relief will be tapered down from the higher rate to the basic rate. Full higher rate relief will still be available for all pension contributions if your income is less than £150,000.
Does it make sense to contribute to a pension if your tax relief will be limited to the basic rate? If you are likely to be a higher rate taxpayer after retirement, the relief on contributions may be at a lower rate than the tax rate you will be paying on your pension.
Despite this, other factors could still weigh in favour of pensions. Ultimately, a decision about the relative benefits of 20% tax-relieved pension contributions will depend upon your personal circumstances and retirement planning objectives. Of course, the rules could well change again. Even if you are not directly affected by the new rules now, you should bear them in mind in your tax and financial planning. It might be worth taking advantage of the full tax relief on pension contributions while you can.
