It has been announced that the restriction of tax relief on pension contributions from April 2011 is to be achieved via a substantial reduction in the annual allowance rather than by means of the high income excess relief charge, the legislation for which was introduced by FA 2010, Sch. 2.
Under the original proposals, higher rate relief would be restricted in respect of pension contributions made by high earners such that those with gross income of £180,000 or more would only receive basic rate relief. Tapering provisions were to have applied to those with gross incomes of between £150,000 and £180,000.
However, these provisions are to be repealed. Instead relief on pension contributions is to be restricted by reducing the annual allowance from its current level of £255,000 to £50,000 from 6 April 2010. Unused allowances can be carried forward for three years before being lost. The measure effectively caps pension contributions at £200,000 over a four-year period.
Transitional rules apply to those whose pension input period for 2011/12 started before 14 October 2010 (the date on which the reduction in the annual allowance was announced).
The lifetime allowance is also to be reduced from £1.8 million to £1.5 million. However, the reduction will not come into force until 6 April 2011.
Further details on the proposed changes to the rules, including draft legislation and explanatory notes, together with guidance for individuals, is available on the HMRC website.