2009 UK Budget Targets Pensions and High Earners: Ignoring the Changes Could Damage Your Wealth

Until the 2009 Budget, saving through a pension scheme represented an attractive tax planning route for high earners in the UK.  They could claim higher rate tax relief on all pension contributions to a registered pension scheme up to the annual limit for relief (i.e. the lower of the annual allowance, £245,000 for the 2009/10 tax year, and their total annual income). 


With the introduction of the 50% income tax rate from 6 April 2010, and the abolition of personal allowances for high earners from the same date, this generous tax relief was never likely to survive in the current climate, particularly given the government’s claim that, in 2008/09, those with incomes of over £150,000 (the threshold for “high earners” for this Commentary) represented 1.5% of pension savers, yet received a quarter of all tax relief on contributions.  The government has, therefore, announced that it intends to restrict the tax relief on pension savings for high earners with effect from 6 April 2011.  The tax relief will be tapered away for those earning between £150,000 and £180,000 per annum so that, for those earning over £180,000, it will only be available at the basic rate (currently 20%).


Naturally enough, the government was not going to risk high earners making large increased contributions, or increasing their benefits, to take advantage of the higher rate tax relief before the new provisions take effect in April 2011.  Consequently, the 2009 Finance Bill includes provisions which will allow high earners to continue arrangements already in place on 22 April 2009 (Budget Day) under the current regime, but recover the higher rate tax relief on any additional pension savings or pension accrual effected after Budget Day.  As these provisions have immediate effect, both employers and high earners need to be aware of their potential impact. 


The Interim Measures:  2009-2011


It is important to emphasise that all high earners who do not change their normal pattern of regular pension savings as at Budget Day (subject to some of the pitfalls below) will continue to receive higher rate tax relief on all those contributions for the next two years.  If, however, that pattern changes, they will lose some or all of that relief if the following requirements are satisfied:

  • they have annual taxable income of £150,000 or more in any of the tax years 2007/08 to 2010/11; and
  • they increase their pension savings from 22 April 2009 beyond the normal regular pension savings (e.g. by increased employee or employer contributions to a money purchase scheme or a better accrual rate under a defined benefit scheme);  and
  • their total pension savings (including employer contributions) in 2009/10 or 20010/11 exceed £20,000 (referred to as the “special annual allowance”).


If these conditions are met, they will be subject to a “special annual allowance charge” (which in effect cancels out the higher rate tax relief) on any increase in total pension savings on or after 22 April 2009 as follows:

  • if their normal regular pension savings are less than £20,000, the tax charge will be on the “excess” pension savings over £20,000;  and
  • if their normal regular pension savings are already over £20,000, the tax charge will be on the full amount of the increased pension savings.


The tax charge for 2009/10 will be 20% (the difference between the top and basic rates of income tax), although this will probably rise to 30% in line with the introduction of the new 50% tax rate for 2010/11.


The Pitfalls


Although the government’s intentions are relatively clear, there are, as ever, pitfalls for the unwary and some unresolved issues which may be clarified before the Finance Bill is enacted in the summer.

  • In calculating taxable income, all taxable income (less pension contributions up to £20,000) must be taken into account in determining whether the £150,000 threshold is reached.  Irregular earnings, such as bonuses, commissions and income on exercise of share options, will be included.
  • Salary sacrifice schemes set up after 22 April 2009 will not help to reduce taxable income.  Any salary foregone must be added back into the income calculation.
  • For contributions to qualify as normal regular pension savings, they must have been paid at least quarterly before 22 April 2009.  This is a problem for those, particularly the self-employed, who have made regular contributions but on, say, an annual basis. These will not constitute regular contributions under the proposed legislation.  (This is an area where the government is prepared to listen to representations as it is clearly unfair to treat normal but less regular contributions in a different way.)
  • Entry by individuals into new pension arrangements after Budget Day, for example on changing employment, may take ongoing contributions to the new pension scheme outside the definition of normal regular pension savings.  Whilst there are some exemptions which would allow such contributions to fall within normal regular pension savings where an individual joins a new employer’s pension scheme, these exemptions are quite limited and are unlikely to help senior high earners.
  • There are anti-avoidance provisions which the Revenue will use to remove some of the interim protection for high earners if any attempt is made to avoid liability to the special annual allowance charge.  Any schemes which seek, for example, to reduce income below the £150,000 threshold, or to change current arrangements in any way, should be approached with caution.


In recognition of the fact that it could be easy for high earners inadvertently to exceed the special annual allowance when making their pension contributions, high earners may be able to ask their pension scheme for a refund of contributions for the tax years 2009/10 and 2010/11 if the contributions would attract a special annual allowance charge, but only in respect of non-regular contributions.  Refunds will be paid after deduction of tax at 40% from the refunded contributions and as a lump sum in the tax year following the one in which the contribution was made. 


The Take Aways


High Earners.  They should take advice before making any changes to their current pension arrangements, in particular any changes to contribution patterns, and on the consequences in particular of non-regular lump sum contributions.  They should be particularly wary of changes which arise if they move employment, and should seek advice on any new arrangements.


Employers.  They will have to consider carefully any changes to existing pension arrangements which may affect particular employees.  They should also consider, in due course, whether their existing compensation arrangements are appropriate for high earners given the fact that contributions to pension schemes are going to be less tax efficient.


It is worth reiterating that the measures described in this Commentary are only temporary and will be swept away entirely in April 2011 by the removal of higher rate tax relief on pension savings for high earners.  The news is not good for high earners, but it may be worse if they are not mindful of and prepared for the changes.


Lawyer Contacts


For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our “Contact Us” form, which can be found at


John Papadakis

Partner, London

+44 (0) 20 7039 5272  


Rosalind Connor

Partner, London

+44 (0) 20 7039 5446


Anna Copestake

Associate, London

+44 (0) 20 7039 5315  


Nicola Rondel

Associate, London

+44 (0) 20 7039 5176


This Commentary is a publication of Jones Day. The contents are for general information purposes only and are intended to raise your awareness of certain issues (as at May 2009) under the laws of England and Wales. This Commentary is not comprehensive or a substitute for proper advice, which should always be taken for particular queries. It may not be quoted or referred to in any other publication or proceedings without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, a solicitor-client relationship.