Oh Darling! Be honest with me!

We know from the April 2009 budget that higher rate tax relief on pension contributions will be abolished for high earners from April 2011. Complicated "anti-forestalling" measures were introduced to prevent clever avoidance schemes in the meantime affecting those with incomes over £150k a year.

More changes were introduced in the Pre-Budget Report on 9 December 2009. The Treasury issued a consultation which closed on 3 March 2010.

As originally announced in April 2009, the restriction of tax relief on pension contributions would apply to those with an income of £150k a year. In the Pre-Budget Report in December 2009, the Chancellor announced his intention that the restriction will apply to those with gross incomes of £150k and over. "Gross income" includes "all pension contributions, including the value of any pension benefit funded by, or eventually funded by, an individual's employer".

The consultation paper makes clear that both employer and employee contributions are to be included in the definition of gross income. In one sense I can see the logic of this – why should an employee earning £140k but with an employer pension contribution of £20k be excluded while an individual earning £160k out of which he makes his own pension contribution of £20k is caught. But the end result is that the tax increase comes in for those on salaries below £150k. The change has the effect of lowering the threshold at which the restriction bites (subject to the £130,000 floor discussed below).

"Gross income" also includes the value of any pension benefit funded (or eventually funded) by the employer – effectively, the value of any defined benefit pension accrued by the individual during the year will be converted into a deemed contribution. The consultation paper seeks views on how to achieve this. Previous tax rules have used a simplistic formula of 20 x pension earned in the year. Without going into the maths here, that will catch basic accrual.

Although the new definition reduces the threshold at which the restriction bites, the Pre-Budget Report also announces that an "income floor" is to apply so that any individual with a pre-tax income (excluding the value of any employer contributions) of less than £130k will be unaffected.

Taxing high earners is, in my mind, a good idea, especially when our public finances are in such a mess. But hiding tax changes in complicated pensions rules damages an industry that is already badly damaged by complex rules and a lack of support from politicians. Darling, I wish you would just be honest with us and increase income tax instead.

Posted by: David Gallagher