Those who earn between £150,000 and £180,000 could be hit with an income tax rate of 71.5 per cent or more, from April 2011, if a raft of restrictions on the tax relief of pension contributions is introduced.

Tax advisers are lobbying the government to modify some of its “draconian” proposals up for consultation.

Mike Warburton, tax partner with accountants Grant Thornton, said some earners could be “in the ridiculous position of having an extra tax bill that is greater than their extra income”.

Another issue raised is how HM Revenue and Customs will treat the taxation of final-salary schemes. From 2011, the Revenue has indicated it will look to tax the increase in the pension pots of employees who receive a pay rise. “This personal tax charge could well be more than the rise in the employee’s income,” said Warburton. “If the government goes soft on this issue, it will run the risk of being accused of giving special treatment to those lucky enough to still have final-salary schemes.”

How it works out:

An employee earns £ 160,000 a year and makes personal pension contributions of £ 10,000. If a pay rise of £10,000 is then awarded, this extra income will attract tax at 50 per cent (£5,000). Tax relief on the pension contribution drops from 40 per cent to 30 per cent, which means that the tax bill rises by an extra £1,000. So the total tax bill on the extra £10,000 is £6,000 or 60 per cent. Add 1.5 per cent for National Insurance.

Now do the same calculation with a £20,000 pension contribution and the extra tax becomes £7,000. With National Insurance, the overall rate is 71.5 per cent.