The measure

As announced in the April 2009 Budget, higher rate income tax relief for individuals whose income exceeds £180,000 is to be removed altogether from 6 April 2011, so that they will only get basic rate relief on contributions to registered pension schemes (but they remain subject to the normal annual and lifetime allowances).

Individuals with incomes between £150,000 and £180,000 will still enjoy some element of higher rate relief, but it will be tapered away.

The government has now published draft legislation and a lengthy consultation document outlining the measures that will take effect from 6 April 2011. Comments on these are requested by 3 March 2010.

Who will be affected?

The restriction will apply only to individuals whose 'gross' income is £150,000 or more. 'Gross' income for the purposes of the £150,000 threshold includes all pension contributions made by or on behalf of the individual. A key point to note is that it will include the value of any pension benefit funded by an employer.

In addition, there will be an income floor of £130,000 so that anyone whose pre-tax income after adding back charitable payments and pension contributions made by them is less than £130,000 per annum will not be affected and will therefore still benefit from higher rate relief, if applicable. For this purpose employer contributions are not counted.

The £130,000 floor is intended to reduce the administrative burden on schemes by enabling them to identify more easily those who are definitely not affected by the new rules.

Tax relief will be restricted by the application of a 'high income excess relief charge' which will be self-assessed and will effectively claw back the excess higher rate relief.

Details of the taper mechanism for those with gross incomes between £150,000 and £180,000 are open to consultation. There is one proposal which is to reduce relief by 1% for every £1,000 of gross income between these limits. Another is to reduce relief by 0.01% for each additional £10 of gross income.

For example, an individual with gross income of £170,000 makes personal pension contributions of £20,000. Absent these restrictions, 50% marginal tax relief would apply to these contributions, giving tax relief of £10,000. Applying the restrictions, the individual would have a taper rate of 30% (ie a reduction in relief of 1% for every £1,000 of gross income over £150,000, in other words a clawback of 20%). Therefore, the high income excess relief charge would be £4,000 (20% of £20,000), while the individual would still benefit from tax relief of £6,000 (30% of £20,000).

Where the charge exceeds £15,000 the individual will have the option of asking their scheme to pay it out of their pension pot. Where that is not possible the charge may be spread over three years. .

When?

The restriction of higher rate relief will take effect from 6 April 2011.