Income matters post 2010

For those fortunate enough to have a very high income, investing in a pension after 2011 looks less attractive. And remember it is not just earned income which matters - all income, including dividends from shares and interest on savings is taken into account.

 From 2011, high earners are limited to 20% relief on their contributions, and also face a tax charge on any employer contributions. So these people may find alternative investments are more tax efficient. These may include ISAs, pension contributions for a spouse or child, growth investments which give rise to capital gains tax, and qualifying life policies.

In this tax year and next, paying in £20,000, or a higher amount justified by existing regular contributions, appears to be a sensible option as this is the final opportunity for high earners to receive higher rate tax relief. But bear in mind the definition of regular contributions only includes monthly and quarterly payments. If payments have altered through the tax year, the lowest figure will be used. For example, if Angela made two monthly payments of £2,000 and then increased to £2,500 for the remaining ten months, the protected amount for 2009/10 and 2010/11 is £24,000 - twelve times the lowest contribution of £2,000. Any payments above £24,000 will only receive basic rate tax relief.

There is an exception to this rule where contribution increases are 'pre-determined'. For example, where amounts increase in line with earnings or at a fixed annual rate, the whole amount would continue to receive higher rate relief. People who regularly paid annual amounts - such as the self-employed - are also being unfairly penalised, with higher rate relief likely to be limited to £20,000 each year.

People with income below £150,000 can still pay in large contributions and receive higher rate tax relief. And some may want to accelerate the amounts they pay. If people anticipate their income increasing above £150,000 then paying extra amounts now, while higher rate relief is still available, makes sense. In a similar way, if people believe the Government may extend this tax charge down the income scale, to cover more and more people, then they should accelerate their pension funding.

The gradual removal of the personal allowance from April 2010 offers another tax planning opportunity. The allowance will reduce by £1 for every £2 of income over £100,000 which introduces a marginal tax rate of 60%. This means salary sacrifice for those with income between £100,000 and £150,000 looks particularly attractive.

It is important to remember that these changes do not affect the majority of pension savers, who can continue their pension provision as normal. Nonetheless, it creates a worrying precedent by breaking the long-standing principle that an individual receives tax relief on their pension contributions at their highest marginal rate. And continuing along a road of constant change does nothing to increase confidence in pensions at a time when we need to encourage more people to save. However, the added complexity gives advisers many reasons to talk to their most important clients.