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Tax relief slashed for top-earners

From April 2011, people earning over £180,000 will see their pension tax relief restricted to the basic rate of 20 per cent. Those earning between £150,000 and £180,000 will get relief at a rate between 40 and 20 per cent.

Following this announcement, thoughts immediately turned to maximising the pension contributions of high earners over the next two years.

But closer inspection of the detailed Budget notes reveals complicated “anti-forestalling” rules that will restrict tax relief in certain circumstances. These special rules will apply for the current tax year and for 2010/11.

Only those who have earned £150,000 or more in the current or two previous tax years are affected. These people will have tax relief on their pension contributions above a new special annual allowance of £20,000 restricted to 20 per cent.

The limit applies to the total of employer and employee contributions so hopes of using salary sacrifice to circumvent it are dashed.

This £20,000 limit will be higher for those who are already paying in regular mon-thly or quarterly amounts above £20,000. This is called a “protected input amount”.

For example, someone alr-eady paying in £3,000 a month can continue to do so and get 40 per cent tax relief on the full amount.

Regular contributions that increase in line with salary or a pre-agreed rate are also exempt.

Tax relief above the special annual allowance or protec-ted input amount will be restricted by applying a special annual allowance charge of 20 per cent this year, rising to 30 per cent when the top rate of income tax goes up to 50 per cent in April 2010.

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