It is not yet clear how the proposed withdrawal of higher rate pension relief will work from April 2011, but take at face value the Budget Notice statement “ higher rate relief will be tapered away for income between £150,000 to £180,000” and you end up with some truly awful marginal rates for anyone making pension contributions with income at this level.

An individual earning £150,000 and making pension contributions of £15,000 would receive full tax relief at basic and higher totalling £6,000. The same individual with earnings of £180,000 would get the tax relief at basic rate only which would be £3,000. This loss of £3,000 tax relief equates to an extra 10% tax on the income between £150,000 and £180,000. Taking this to extremes, the maximum pension contribution allowable for tax relief is 100% of earnings.  If we “taper away” higher rate relief on a pension contribution of £150,000 then on the increase in earnings from £150,000 to £180,000 we would loose relief worth £30,000 which equals 100% of the increase in income. Add to this the 50% higher rate tax and you end up with a 150% marginal tax rate.     

We have yet to see if this is how the pension relief withdrawal will work but the message is clear, if your income is over £150,000 then you will need to think  very carefully before topping up your pension.