High Earners

May 18th, 2009

If you are classed as a ‘high earner’, you may find that the higher-rate tax relief applying to any additional pension contributions is restricted so that you only receive basic-rate relief.

On 21 July 2009, a new ‘special annual allowance’ was introduced by The Finance Act 2009 to apply between 22 April 2009 (Budget Day) and 5 April 2011 to restrict higher rate tax relief on pension contributions in respect of those ‘high-earners’ who:

Have relevant income of £150,000 or more in the current tax year or either of the previous two; and Save more than £20,000 per tax year into a pension; and Have increased the level of their annual pension contributions after 21st April 2009

This ‘special annual allowance’ however will be reduced by the level of any regular, ongoing pension contributions, which commenced prior to 22nd April 2009.

Regular ongoing contributions which commenced before this date are called ‘protected pension input amounts’ and whilst these contributions cannot give rise to a tax charge themselves, the effect of them reducing the ‘special annual allowance’ can be seen in the following example:

Mark, who is self-employed has total relevant income of £170,000 for 2009/10 and has been making regular monthly pension contributions of £1,000 a month to his personal pension for the past 3 years. He has not made any other contributions.

Because the £1,000 a month contributions are classed as a ‘protected pension input amount’ Mark’s ‘available’ special annual allowance for the 2009/10 tax year is therefore £8,000 (£20,000 – £12,000).

This means he can make an additional single premium contribution of up to £8,000 and receive higher rate tax relief on the contribution.

It is important to note though that under the original proposals that were published on Budget Day, ‘regular ongoing’ contributions had to be made at least quarterly in order to qualify to be classed as a ‘protected pension input amount.’

This meant that regular ongoing contributions made half-yearly, or yearly, would not be classed as ‘protected pension input amounts’ and would therefore count towards, and be tested against, the £20,000 special annual allowance.

It has since been recognised that this unfairly penalises the self-employed, whose available profits are often not known until their year-end and employees who fund their pension from end-of-year bonuses.

As a result, the regulations have been amended to allow individual’s to claim an increased special annual allowance if regular ‘less than quarterly’ money purchase contributions have been made either by, or on behalf of an individual, (including by an employer) subject to an overall cap of the lower of :-

The average ‘less than quarterly’ contribution over the last 3 tax years; and £30,000
As long as The average ‘less than quarterly’ contribution over the last 3 tax years has been higher than £20,000.

Therefore if the average ‘less than quarterly’ contribution over the previous 3 tax years is less than £20,000 then the total contributions that can be paid in the current tax year (and the next) before the special annual allowance charge is levied will remain at £20,000. The practical effect of this on people with total relevant income of £150,000, or more, is probably best demonstrated with some examples:


Mrs Brown has been paying £1,000 a month (£12,000 per annum), topped up with an annual £18,000 contribution in each of the past three tax years.  She could therefore pay up to £20,000 in total this tax year and the next.  That is another £8,000 in addition to the monthly contributions of £12,000 pa, but less than the total of £30,000 she was previously paying.

Mr Bond has been paying £1,000 a month (£12,000 per annum) topped up with an annual single payment of £25,000 in each of the past three tax years. Because the average single annual payment amount of £25,000 is more then £20,000, he qualifies for an increased special annual allowance of £25,000.

This means that if he continues to pay £12,000 per annum on a monthly basis, he can top this up with an annual payment of £13,000 without incurring a special annual allowance tax charge.

Mrs Bean has been paying £3,000 a month (£36,000 per annum) and has topped this up in each of the last three tax years with annual single amounts of £32,000, £34,000 and £36,000 respectively. Because, however, the average annual payment of £34,000 exceeds £30,000, her special annual allowance is capped at £30,000.

This means that if she continues to pay £36,000 per annum on a monthly basis, whilst the whole £36,000 will qualify to be treated as a protected pension input amount, there is no scope to make any additional contributions without incurring a special annual allowance tax charge.

If you think you may be affected by the introduction of these provisions you should ensure that you take appropriate advice before taking any action.

The levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.