In April's Budget, it was announced that tax relief on pension contributions in respect of higher earners (those with taxable incomes in excess of £150,000) would be eroded with the effect that those with taxable incomes of over £180,000 would only receive tax relief at the rate of 20%. These measures are due to take effect in April 2011 and are explained in more detail in our bulletin here

In the Pre-Budget Report, the Chancellor confirmed that employer contributions (and the value of any benefit funded by the employer in a defined benefit scheme) will be included when calculating an individual's taxable income, provided that an individual's pre-tax income (including their own pension contributions and any charitable donations) is at least £130,000. This means that individuals whose pre-tax income is over £130,000 will need to establish the value of the pension benefit funded by their employers and may see the tax relief on their pension savings restricted.

The Treasury has issued a consultation paper on how this is to be implemented: here Amongst the key points are:

  • The Government confirms that employers will continue to receive relief from tax and National Insurance Contributions on their contributions to employees' pensions.
  • The resulting tax charge will usually be collected via self-assessment, as originally proposed in April's Budget. However, individuals with the highest charges (that is, exceeding £15,000) will be able to opt for their pension scheme to pay the charge on their behalf, with schemes reducing their pension pot or accrued pension entitlement for that year by an equivalent amount. The Government is considering whether to allow the spreading of payments over three years in very limited circumstances (for example, where someone is a member of an overseas scheme, or where the scheme is "very under-funded").
  • Whilst it is usually straightforward to identify the value of employer and employee contributions in defined contribution arrangements, it is more difficult to value pension savings in defined benefit arrangements. The Treasury is consulting on whether to use a system of age-related factors to achieve this.
  • Those whose taxable incomes exceed £180,000 will see the tax relief on their pension savings restricted to the basic rate. However, tax relief will be tapered in respect of those whose incomes fall between £150,000 and £180,000. The Government is consulting on the nature of this tapering system and on "the best balance to strike between the smoothness of the taper and simplicity for individuals".
  • The Government proposes that, in the year benefits are drawn, the income measure will be the higher of the individual's gross income in the previous tax year or his or her income in the year in which benefits are taken (subject to the £130,000 floor).
  • The Government confirms that it is "minded" to exempt the first £30,000 of a redundancy payment (and other termination payments) from income for the purposes of restricting tax relief on pension contributions. The Government is also willing to consider further targeted options for mitigating the impact of the restriction on those affected by redundancy that do not open up opportunities for abuse.