Randall & Payne Chartered Accountants, Gloucestershire, have welcomed the government's efforts to reach a compromise on taxing high earners' pensions contributions, the present system being both costly and highly complicated.

Before April 2009, tax relief was provided on pensions contributions at an individual's marginal tax rate. So for 40% taxpayers, contributions would attract 40% relief, regardless of income, adding a substantial uplift to the value of contributions. Alistair Darling's final budget aimed to eliminate higher-rate tax relief for gross incomes in excess of £180,000 (gross income including all pension contributions made by or on behalf of the individual i.e. it includes employer pension contributions/benefits). For gross incomes between £150,000 and £180,000 the higher rate relief was to be tapered away.

High earners would face a high income excess relief charge through self-assessment, so earnings in excess of £180,000 would mean a personal tax charge on employer pension contributions, ensuring that pension contributions enjoyed only basic rate tax relief. Where the total charge exceeded £15,000 the individual could spread the charge over three years or ask the scheme to pay the charge out of their pension funds.

Mike Anthony, from Randall & Payne, Stroud, explains: "The issue of ‘relevant income’ becomes a potential ‘minefield’. For example someone with ‘relevant income’ of less than £130,000 could have employer’s pension contributions of over £25,000 without an excess charge, but someone with relevant income of £135,000 and an employer pension contribution of £20,000 would be charged on £5,000 of their pension contributions, with more people affected over time as incomes increase and the income thresholds remain static.”

HM Revenue & Customs and the Treasury are jointly handling a consultation on pension tax reliefs. Vincent Oratore, of the Chartered Institute of Taxation said: "The review of the proposed changes to pensions tax relief is especially welcome. We all understand that pensions tax relief is going to be curtailed, but there has to be a simpler way than the complex and costly system previously legislated for."

An “unintended consequence” could be a shift by employers away from final-salary schemes and towards defined contribution pension plans – which typically result in lower pension payouts.

For more information on the potential tax implications of the proposed changes to pensions tax relief contact Mike Anthony on 01453 763471.