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Plan a relief route

The Budget introduced new rules that restrict higher-rate tax relief on individual pension contributions with immediate effect. On the surface, these changes may appear unfavourable but clients may still be able to benefit if they seek the right financial advice.

It is paramount that advisers review clients’ pension contributions as they may be eligible to extend the tax relief on their retirement funding despite the new rules.

The rules add significant complexity but, with careful financial planning, the upper income limit under which people can receive higher-rate tax relief on pension contributions can be extended to at least £170,000, a significant difference from the publicised limit of £150,000.

The new interim rules only exist until April 5, 2011 so investors looking to maximise pension tax relief need a review as soon as possible.

The new rules only apply to clients who have relevant annual income of £150,000 or higher in the current or previous two tax years. However, in calculating the relevant income limit for both this year and the 2008/09 tax year, clients can offset relievable personal contributions they made in the last tax year (for the calculation of relevant income for 2008/9),or will make towards their pension in this tax year by up to a maximum of £20,000.

This means an individual with relevant income of £169,000 in this tax year, whose relevant income in the two previous tax years was below £150,000, can make a relievable pension contrib-ution of £20,000 and be deemed to have an annual income of under £150,000 for the purpose of tax relief on pension contributions.

This will then enable the client to contribute up to 100 per cent of their relevant earnings and benefit from increased higher-rate tax relief on those contributions.

In addition, if individuals are employed, their employer could make pension contributions up to the current annual allowance of £245,000 on their behalf without the new 20 per cent tax charge on the individual applying.

It is also crucial to consider income received in the previous two years as well as this year. If relevant income was over £150,000 two years ago (2007/08), the client will be caught this year by the new rules. If relevant income was over £150,000 last year (2008/ 09) after taking account of the £20,000 relievable pension contribution allowance, gift aid could be considered to bring relevant income below the £150,000 limit.

The tables demonstrate how careful financial planning can help people.

Anyone with relevant income over £150,000 has decisions to make if they want to continue to benefit from the hugely valuable higher-rate tax relief, particularly if they or their employers are in a position to make very significant pension contributions.

Change and added complexity will drive the need for advice and presents advisers with further opportunities and reasons to revisit clients with income over £150,000.

Colin Jelley is head of tax and financial planning at Skandia


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