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Pension contribution tax relief plans to be amended

A measure limiting how much tax relief people can claim on their pension contributions has been changed by the government.

As from April 2011, pension contribution tax relief for those earning more than £150,000 will be cut.

However, to prevent people from making excessively high pension contributions between now and 2011 – in order to take advantage of the higher rate of relief still available – the government introduced anti-forestalling rules in the Budget.

The rules said that the current higher rate of relief only applies to pension payments which are within a ‘protected pension input amount’. This amount was originally to be calculated according to a person’s existing pension payments made on a quarterly or a more regular basis.

Anyone who paid on a less regular basis would receive the higher rate of relief only on contributions lower than £20,000.

But the rules were criticised for being unfair to those who do not make frequent pension payments, such as the self-employed, who may only decide how much to pay once they are sure of their earnings for the year.

Now the government has decided to change the rules.

Providing the amendments to the Finance Bill are accepted by Parliament, the ‘protected pension input amount’ can be worked out according to the average of irregular contributions paid in the three years to 5 April 2009 and will be capped not at £20,000 but £30,000, or the earnings for the year if that’s lower.

Andrew Hubbard, the president of the Chartered Institute of Taxation (CIOT), welcomed the decision.

He said: “The CIOT highlighted the unfairness in the original proposals, which favoured those who paid, or whose employer paid, regular monthly or quarterly pension contributions, while disadvantaging those who made less regular contributions.”