The position, however, for high earners after 2011 will be different. The Government announced at Budget 2009 its intention to restrict tax relief on pensions savings with effect from 6 April 2011 for those with incomes of £150,000 or over. Today it issued a consultation document on how the restriction will be implemented from April 2011.
Essentially, the basic intention is that tax relief on pensions contributions will be restricted for those on “gross incomes” of £150,000 and over, gradually tapering down so that for those on incomes of £180,000 and over the tax relief is worth the same as it is for a basic tax rate payer.
An individual’s “gross income” will include both the value of the individual’s pension contributions and any pension benefit funded, or eventually funded by, the employer on their behalf. It is also calculated before any deductions for charitable donations are made.
However, there will also be a ‘floor’, so it will only apply where the individual’s income (excluding employer pension contributions) is £130,000 or over. So an individual is not affected unless their pre-tax income including their own pension contributions and charitable donations is £130,00 or over.
That said, it seems from the consultation document that there are still a number of major issues, let alone detailed issues, to be considered (e.g. how tapering works, how employer contributions will be valued for final salary schemes, how the restriction on relief will be delivered). As such it will be sometime before we see how the legislation will truly shape up for high earners after 2011.
The consultation will run for 12 weeks and the closing date for responses is 3 March 2010.