Pensions after 2011 – some more detail but not the full picture

David Farmer, Pensions Partner, Olswang

The Government has confirmed that tax relief restrictions on pension contributions for high earners will apply from next year for those with incomes of £150,000 or over. Essentially, tax relief on pension 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.

Alongside the 2009 Pre-Budget Report the Government launched a consultation on the implementation of the restriction of pensions tax – this closed on 3 March 2010. Today the Government published ‘Implementing the restriction of pensions tax relief: a summary of consultation responses‘. This sets out a number of decisions on some of the significant features of how the restriction of relief will be applied.  In particular:

  • there will be a stepped taper of 1 % of relief for every £1,000 of gross income; and
  • contributions to defined benefit pension schemes will be valued using an age-related factors method rather than flat factors or cash equivalent transfer values.

However, it is clear from the consultation response document that there are still a number of detailed issues to be considered. The Government will continue discussions with stakeholders on these issues with the intention that details of how the restriction of relief will operate will be set out by Finance Bill 2011.

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