Pre Budget Report 2009 - Pension contributions

In the April Budget we were told about the restriction on higher rate tax relief for pension contributions that would bite on people with incomes over £150,000 in 2011/12, and also measures to stop people keeping the benefit of that relief by paying extra contributions in advance of 6 April 2011 (so called "anti-forestalling rules"). If someone has had income of at least £150,000 in the current or the last two tax years, and makes a "special pension contribution" of more than £20,000, they may suffer a tax charge of the difference between the higher rate relief they would expect and the basic rate relief that they would be entitled to in 2011.

The PBR includes a measure to tighten up this rule. HMRC have realised that pension contributions paid by a self-employed person or by an employee are effectively part of their gross income and so count towards the £150,000; contributions paid directly by an employer are not. So someone with a salary of £200,000 who paid a contribution of £80,000 would be caught, but someone with a salary of £120,000 whose employer paid a contribution of £80,000 would not.

For contributions paid on or after 9 December 2009, employer contributions will count towards an employee's income limit when measuring it against £150,000. However, someone with an income of no more than £130,000, before the employer contribution is added, will not be subject to the supplementary charge.

These rules are complex, and anyone who has had total income approaching £150,000 in any of the last three years should take advice before paying a pension contribution totalling over £20,000 in a year.