Currently, unless an individual has accessed their pension and is subject to the money purchase annual allowance of £10,000, income tax relief is available for annual pension contributions of up to £40,000 (plus any unused relief carried forward).
This relief is available whatever the level of the individual’s income, and will be available at their marginal rate of tax.
From 6 April 2016, individuals who have income for the tax year of over £150,000 will have their annual allowance for that year restricted. For every £2 of income over £150,000 their annual allowance will be reduced by £1. The maximum reduction to the annual allowance will be £30,000, so that anyone with adjusted income of £210,000 or more will have an annual allowance of £10,000.
Adjusted income is taxable income including the value of pension contributions for the year, so that individuals who make their own contributions are in the same position as individuals whose employer makes contributions on their behalf.
To provide some certainty for scheme administrators the restriction will be subject to an income floor of £110,000, known as threshold income. Where an individual has threshold income of £110,000 or less they cannot be subject to the restriction regardless of the level of their adjusted income.
Income tax relief will continue to be available at the individual’s marginal rate of income tax.
These provisions restrict the amount of pension contributions in respect of which a high earner can claim income tax relief.