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Contractor pension tax hike ahead as tax relief cut from 2011

Published on Apr 24, 2009 |

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In the Budget, Alistair Darling announced that higher rate (40%) tax relief will no longer be available for 'high earner' pension contributions from April 2011.

For entrepreneurs, and some high end IT contractors, this could result in a significant increase in their tax bills.

The Government has estimated that even though only 1.5% of workers earn over £150,000 per year, the same group of people account for 25% of all tax relief on pension contributions.

From April 2011, pension contributions for those earning over £150,000 per year will be effectively taxed at 20%, resulting in a significant jump in income tax for those affected.

The Government estimates that they will raise over £3bn per year from 2012 as a result of the reduction in pension tax relief for higher earners.

It hasn't gone unnoticed that those public sector employees earning over the £150,000 mark will be virtually unaffected by the change, as their pensions tend to be very generously funded by the Treasury, and are not as reliant on private contributions.

You can read more opinion on the pension changes in the Telegraph.

Also read our essential guide to IT contractor pensions.