The measure

The Government issued on 24 March 2010 a summary of the responses to last December's consultation document on how to implement the restriction of higher rate relief on the pension savings of high income individuals from 6 April 2011. The summary outlines what they have decided on each of the points under discussion and what the next steps in the process are going to be.

Where the restrictions apply, higher rate relief will be reduced by 1% for each additional £1,000 of income between £150,000 and £180,000, so that at incomes of £180,000 and above relief will be restricted to the basic rate. This will work by imposing a tax charge to recover the excess higher rate relief that the individual will claim through their tax return as normal.

The Government consulted the pensions industry and other professionals on the detail of the proposed new regime but has not been persuaded to change its views except in a few minor areas. As a result:

• The value of an employer's contribution to a defined benefit scheme will be determined using age-related factors which will take into account both the age of the individual and their normal retirement age under their pension scheme. This will result in a significantly higher deemed value for older scheme members compared with younger members. Members taking early retirement will be particularly affected. The factors will be reviewed at least every five years.
• The Government will consider the options for recognising 'negative' deemed contributions to a defined benefit scheme, ie where the deemed employer contribution is valued at less than the amount actually contributed by the employee.
• These measures can affect employees with a salary substantially less than £150,000 who receive exceptional payments, for example termination payments. However, only the first £30,000 of any redundancy payments will be excluded from the income test. Respondents to the consultation suggested the exclusion should be much higher.
• The charges will apply in the year in which pension benefits are drawn by using the income of the previous year, although there will be an exemption where the member retires through serious ill health or dies.
• The tax relief restriction will apply equally to high income members of overseas schemes that benefit from UK tax relief, although it is recognised that some members may have difficulty meeting the self-assessment deadline for reporting any charge payable by them, and further consultation will take place on this point.
• There will be an obligation on employers, in conjunction with pension scheme administrators, to provide information to employees to enable them to be able to self assess their position. This will represent a particular burden for defined benefit scheme administrators. Further discussion will take place on this.
• Where an individual's recovery charge exceeds £15,000 they can spread the payment (plus interest) over three years if their pension scheme is not able to pay it on their behalf.

From 6 April 2011 the special annual allowance will have no further relevance, and normal ongoing regular pension savings will no longer be protected.

Who will be affected?

A high income individual is one whose annual taxable income is at least £150,000 before deducting personal pension contributions and payments to charity, but including any employer pension contributions made on their behalf. Individuals whose income on this basis is less than £130,000, ignoring any employer pension contributions, are not affected.

When?

As announced, the restriction of higher rate relief will take effect from 6 April 2011.