The Government has introduced a new measure to restrict tax relief for pension savers earning over £150,000 per year to the basic rate of tax of 20%.

This has generated much publicity but just who could this affect?

So, how does this new 20% restriction work?

  • It will affect any individual with income of more than £150,000
  • The £150,000 is total income from all sources for the year
  • The individual will be required to determine whether they are caught and they will pay the charge
  • If they are, they will be subject to a "special annual allowance charge"
  • If the individual already has established a regular (at least quarterly) normal pattern of savings, those pension savings will be protected from the charge
  • Any pension savings not protected and exceeding £20,000 will be subject to the new charge
  • Any new "salary sacrifice" arrangements won't act to reduce earnings to avoid the new charge.

So who will be affected?

Of course, anyone earning over £150,000 per annum will be caught. But it's not just the "high earners" – it will cover the following situations too.


Philip, 55, a long-serving senior manager earning £90,000 per year is made redundant.

Philip's employer agrees to pay him £180,000 under his compromise agreement.

Philip decides to put the £180,000 into his pension scheme, by sacrificing his entitlement in return for a special employer contribution into his pension scheme.

Rather than having his pensions savings boosted by 40%, he will face a personal tax charge of £32,000 (£180,000 less the £20,000 'allowance, charged at 20%) to ensure he only gets basic rate relief on his contribution.

Share option gains:

The same logic applies here – gains from exercising share options count towards working out the £150,000 level of earnings.

So anyone exercising share options which will take them to this level of income will need to carefully watch the pension contributions they make if they want to avoid this new charge.

So what does this mean for employers?

Well, as this is a charge on individuals, there are no immediate obligations, and no changes to payroll will be required. There are no pay-as-you-earn implications of this change.

  • However, any time an employer is
    • making changes to their pension;
    • hiring new employees; or
    • considering redundancy payments,

the impact of this new charge should be considered.

  • On a wider note, these changes coupled with the new 50% rate of income tax are making companies think about reviewing the remuneration structures they have in place - now may be the ideal time to review these.