Pension contribution limits

High earners who take a redundancy pay-off could find themselves caught by new laws that restrict tax relief on pension contributions. From 2011, pension tax relief for those earning more than £150,000 will be restricted, after the government announced changes to higher-rate tax in this year’s Budget.

But “anti-forestalling” measures have been introduced in the meantime to stop high earners topping up their pensions before the rules come in.

The measures apply to anyone earning more than £150,000 in a tax year, who has more than £20,000 already saved into a pension pot and who tries to change their “regular” pension contributions. “Regular” has been defined as at least quarterly – meaning that those who make annual lump sum payments of varying amounts are likely to be caught by the rules.

These people can now only get higher rate tax relief on a maximum of £30,000 of their earnings.

However, consultants at Deloitte have warned that the rules could also catch out people who receive large one-off redundancy payouts that take them into the £150,000 bracket this tax year. Even if their earnings next tax year are below £150,000, the anti-forestalling measures will be triggered, limiting the amount of tax relief they can get on future pension contributions.

“When people are made redundant, often they stop and think about putting a one-off contribution in as it’s a good time to boost their pension,” says Susie Hillier, a director in Deloitte’s private client practice. “But when you get another job, you have to be aware of the anti-forestalling legislation.”

At present, pension tax relief is capped at 100 per cent of annual salary up to a maximum allowance of £245,000 a year. Above this level, people have to pay 40 per cent tax on their pension contributions. From 2011, pension tax relief will be tapered away for those earning more than £150,000, so those on £180,000 will receive only basic rate tax relief.