Will high-earners suffer further wealth reductions?

It was hardly surprising and perhaps inevitable given the current economic and financial crisis, coupled with a general election, that the government would attempt to find ways to raise funds to repay the public debt, without adversely affecting the majority of voters. One such method devised by the Labour government was to restrict tax relief on contributions to registered pension schemes, with effect from 6 April 2011, for high-income earners.

The Labour government introduced legislation in the Finance Act 2010 to restrict the tax relief for those people with pension savings, and for those who have a gross income of £150,000 and over. Relief will be tapered away so that for those earning in excess of £180,000, it is worth only 20%, the same as to a basic rate taxpayer. This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the existing annual and lifetime allowances).

Prior to the election, the government released draft technical guidance that explains the key elements of the legislation and how to calculate the high-income charge relief. It is expected that the draft guidance will be incorporated into the technical pages of HM Revenue & Customs (HMRC)’s Registered Pension Scheme Manual following the end of the consultation period. This article aims to provide an overview of the main provisions of the new legislation and draft guidance, while briefly considering the rationale for imposing such a restriction and the interim measures that have been introduced that will apply until the new legislation commences.


The Labour government stated in the Pre-Budget Report (PBR) 2009 that generous tax relief is provided to promote greater independence and wellbeing in later life, in recognition that pensions are less flexible than other forms of saving and to encourage support from employers. According to the consultation document released at the same time as PBR 2009, tax relief on pensions was estimated to be worth around £28.4bn (2% of GDP) in 2008/09.

To justify the proposed restrictions on pension relief for high earners, the government argued that its aim was to deliver a system of pensions tax relief that is fair, affordable and sustainable. According to recent government estimates, the cost of pensions tax relief in the UK has doubled over the past decade and the proportion of tax relief going to those on the highest incomes has risen at a remarkable rate. In the Labour government’s view, which was supported by their calculations, pensions tax relief currently disproportionately benefits those on the highest incomes, with around a quarter of the tax relief on pension contributions going to individuals with incomes of £150,000 and over in 2008/09, although such contributors only consist of approximately 2% of pension savers.

The restriction will therefore only apply to about 300,000 individuals who constitute about 2% of pension savers or around 1% of working-age taxpayers who currently benefit from around a quarter of the tax relief provided on pension contributions.

Anti-forestalling legislation

Naturally enough, Gordon Brown’s government was not going to risk high-income earners making large increased contributions or increasing their benefits to take advantage of the higher tax relief before the new provisions take effect in April 2011. Therefore, to prevent certain individuals from substantially increasing their pension contributions in the period between the announcement and implementation of the restrictions on pension relief, the Budget 2009 introduced an anti-forestalling regime, which took immediate effect.

The broad effect of these anti-forestalling rules introduced in the Finance Act 2009 was to allow high-income earners to continue arrangements already in place on 22 April 2009 (budget day) under the current regime, but to ensure that any higher tax relief on any additional pension savings or pension accrual effected after budget day will be clawed back.

High-Income Excess Relief Charge

As of 6 April 2011, tax relief on pension savings will be restricted for those on incomes of £150,000 or more and will be gradually tapered down so that for those on incomes of £180,000 and over the tax relief will only be worth the same as it is for a basic rate taxpayer (ie 20%).

This means that individuals affected by the restriction will continue to receive at least basic rate relief on all pension contributions (subject to the amount of the individual’s relevant UK earnings, and the existing annual and lifetime allowances that have been set at £245,000 and £1.75m for the 2009/10 year, respectively).

Tax relief is restricted by a ‘high income excess relief charge’ (HIERC). Tax relief is given on any pension contributions in the normal way and will continue to be so, eg through the net pay arrangement or relief at source. The HIERC has the effect of reducing the rate of tax relief given on pension savings to the basic rate of tax and the payment of the HIERC by the affected individual is undertaken through the current self-assessment regime.

Who does the high-income excess relief charge apply to?

The HIERC is a charge to income tax on those individuals who have:

  1. a gross income for the tax year of £150,000 or over;
  2. relevant income for the tax year of at least £130,000;
  3. membership of one or more registered pension schemes; and
  4. contributed to a registered pension scheme of which they are a member in the relevant tax year.

The individual is liable for the charge whether or not they and the pension scheme administrator concerned are UK resident, ordinarily UK resident or domiciled in the UK.

Calculating the charge

The calculation of the HIERC appears to be overly complicated and detailed and this is evidenced by the fact that the recently released guidance requires over 70 pages to explain how the charge is to be ultimately calculated. The draft guidance uses a four-step process to explain how the charge is calculated. This methodology has been followed in this article.

To calculate the HIERC, the following four steps should be followed.

Calculate the individual’s ‘relevant income’

Relevant income is income after deductions, except for pension contributions and charitable donations, plus any relevant salary sacrifice amount entered into after 21 April 2009. Employer’s pension contributions are not taken into account in the calculation of an individual’s relevant income.

If the individual has a relevant income of less than £130,000, the HIERC will not apply.

Calculate the individual’s ‘gross income’ and the ‘total pension savings amount’

Gross income is income after taking account of any deductions, except for pension contributions and charitable donations, plus the total pension savings amount, less any personal contributions. Gross income includes both the personal and employer pension contributions to registered pension schemes.

If the individual has gross income of less than £150,000, the HIERC will not apply.

A component of an individual’s gross income is the total pension savings amount and it is therefore necessary to determine this amount. The total pension savings amount, for any tax year, is the total of all the individual pension savings amounts for each arrangement relating to that individual under a registered pension scheme of which they are a member. The total amount will be dictated by the particular type of arrangement and, given the complexity of the rules, it would be impossible to adequately summarise the different calculations in this article. However, the individual amounts are broadly measured at arrangement level, using a method that depends on the nature of the particular arrangement (ie hybrid arrangements, money market arrangements, cash balance arrangements or defined benefit arrangements).

Determine the ‘appropriate rate’ of the charge.

The restriction of the relief is applied by clawing back the relief given on an individual’s tax return. The HIERC is determined by multiplying the total pensions saving amount by an ‘appropriate rate’.

The ‘appropriate rate’ in relation to the total pension savings amount for a tax year is:

    1. 0% in relation to so much (if any) of that amount as, when added to the individual’s reduced net income for the tax year, does not exceed the basic rate limit;
    2. 20% in relation to so much (if any) of that amount as, when so added, exceeds the basic rate limit but does not exceed the higher rate limit; or
    3. 30% in relation to so much (if any) of that amount as, when so added, exceeds the higher rate limit.

‘Reduced net income’ for these purposes is the amount determined after step three of s23 of the Income Tax Act (ITA) 2007, which is broadly:

  1. identified total income;
  2. less any reliefs listed at s24 ITA 2007 (broadly deductions for trade and property losses); and
  3. less any personal allowances the individual may have.

For individuals with a gross income above £180,000, the appropriate rate is 30%. In those circumstances, where the individual’s gross income for the tax year is less than £180,000, the percentages at ii) and iii) above are each reduced (but to no less than 0%) by 1% for every £1,000 by which it is less than £180,000.

Calculate the high-income excess relief charge

The actual tax is charged on an individual’s ‘total pension savings amount’. Therefore, once the appropriate rate of the charge has been determined, this should be applied to the pension savings amount to calculate the high-income excess relief charge.


As it seems with each new reform proposed by HMRC, targeted anti-avoidance rules will also be introduced with the new legislation. Broadly, these rules will apply in circumstances whereby a scheme is in place that seeks to reduce the member’s gross or relevant income, or their total pension savings amount, which is replaced with some other benefit, or such reduction is redressed by an increase in their income or pension savings amount in a different year.

In circumstances where it is found that a scheme exists that is devised to avoid the HIERC, the individual will be treated as if the gross income for the tax year and total savings amount for the tax year were what they would have been in the absence of such a scheme.


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, the generous tax relief currently afforded to all individuals was never going to survive in the current economic climate. With the Labour government’s assertion that high-income earners (ie those earning in excess of £150,000) representing about 2% of all pension savers receive a quarter of all tax relief on contributions, it is easy to see why the restriction was introduced, particularly with the recent general election.

However, the new rules appear to be overly complex, and have been widely criticised by advisers and the business community in general. It is likely that the new rules will result in significant compliance costs for those affected individuals, and these new rules do little to improve the UK as being an attractive place for highly skilled individuals to work and reside. Perhaps it would have been a better and easier solution for Brown’s government to simply reduce the amount of the annual allowance or lifetime allowance, which are both very generous in comparison to some other jurisdictions?