The government announced its second round of restrictions this year. The chancellor said yesterday that employer contributions will also count towards employees' income when determining whether they will qualify for full higher-rate pension tax relief.
People earning more than £150,000 will see their tax relief on pensions cut from April 2011, tapering from 40 to just 20 per cent for those earning more than £180,000, as set out in April's Budget .
But the restriction will now apply to those with "gross" incomes of more than £150,000, where gross income includes employer pension contributions. This means that those earning less than the original £150,000 level could also be caught in the new rules. Earners below £130,000 will not be affected.
However, those caught out by the new rules will already have restrictions on their pension contributions. The government introduced complex "anti-forestalling" measures this year to prevent those earning more than £150,000 from making top-ups to their pensions of more than £30,000 before 2011. As of yesterday, these measures also apply to those earning more than £150,000 under the new "gross earnings" calculation.
Accountants warned that the limits on higher rate tax relief, added to the higher rate of income tax of 50 per cent in 2011, would deter high earners from paying into a pension..
The Association of British Insurers said the change to pensions tax relief could only do "further damage" to pensions and would not encourage people to make a long-term commitment to saving.