Pension relief hits the buffers
People with relatively high incomes could find that tax relief on part of their pension contributions is effectively restricted to just 20% this year. You will not be affected unless your income from all sources including investments is at least £150,000 in the current year or either of the two previous tax years.
The restrictions apply to individual and employer pension contributions into any registered pension schemes ranging from personal pensions to final salary-related schemes. The excess higher rate tax relief (but not basic rate relief) is taken away through a special tax charge on you personally. The rules were introduced in the Finance Act 2009 and will be replaced from 2011/12.
For the tax years 2009/10 and 2010/11, people with incomes of at least £150,000 can still benefit from full tax relief on limited levels of contributions. The rules are complicated. Quarterly or more frequent contributions started before 22 April 2009 are basically not affected and there is an annual allowance of at least £20,000, which can be higher in certain circumstances. Ask us for details if you think you might be affected now or in the future.
From 2011/12, the restrictions on tax relief are due to be generally tighter.
So does it make sense to contribute to a pension if your tax relief will be limited to the basic rate, especially if you are likely to be a higher rate taxpayer after retirement? Ultimately a decision about the relative benefits of 20% tax-relieved pension contributions will depend upon your personal circumstances and retirement planning objectives. Remember that the rules could well change again.
Even if you are not directly affected by the new rules now, you should bear them in mind. It might be worth taking advantage of the full tax relief on contributions while you can.