Emergency Budget 2010 – review of high earners pensions tax

The Chancellor announced in the Emergency Budget a review of the proposed new tax regime that would have limited the tax relief on pension contributions, or benefits accrued under a defined benefit (DB) pension scheme, for high earning individuals from 6 April 2011.

The proposed high income excess relief charge (HIERC) was to be introduced from 6 April 2011. The HIERC was expected to apply only to individuals with gross annual income above £130,000. The review will consider if the HIERC should be abolished and replaced from 6 April 2011 by a lower annual allowance, expected to be between £30,000 and £45,000, applicable to everyone. The annual allowance is the maximum pension savings that can be made in any year. At the moment the annual allowance is £255,000 and so the proposed reduction is very significant.

The proposed abolishment of the HIERC is to be welcomed. It would have increased the complexity and removed some high earners from the pension system completely which would have distorted the motivation of some employers to continue with pension provision.


However, many of the challenges that made the HIERC complicated remain with a low annual allowance regime. HM Treasury want to consult further on matters such as:

  • How to value DB pension schemes given that the existing flat rate valuation factor of 10 times the annual rate of pension does not look tenable.
  • Should “scheme pays” (where the pension scheme pays the tax bill and then reduces the member’s benefits) still apply if limits are exceeded?
  • What should happen about augmented retirement benefits in events such as ill-health or redundancy?

Thee lower annual allowance will mean that many more people are affected and therefore employers may need to increase significantly the level of monitoring and reporting required. HM Treasury comment that a revised regime may also include an “appropriate level of lifetime allowance”, so the current £1.8m limit may also be under review.


Overall, the Coalition Government’s openness to look at alternatives to the HIERC is to be welcomed. Replacing it with a lower annual allowance should mean a simpler system, and one that keeps higher earners in the workplace pension system, at least for some of their savings. However, a lower annual allowance is not without its own problems and will require careful implementation.

The annual allowance may well need to be reduced to as low as £30,000 (from the current £255,000) a year to raise the required annual tax revenues, affecting more employees than under the previous government's proposals.

We hope that the new proposals will aim to achieve simplicity and understanding, so that the new tax regime is simple and cost-effective to administer and not overly onerous on employers.  Some employers will still be looking to provide ways for higher earners to make long-term retirement savings in addition to pensions, and all employers need certainty over the regulatory framework governing pensions if they are to be remotivated to provide quality workplace pensions.


Employers will welcome not having to face the administrative and cost burdens that the complex and unpopular HIERC would have brought, However, tax restrictions based on such a significantly lower annual allowance will still leave many employers facing important decisions about how best to reward key employees and whether to provide tax-efficient alternatives to registered pension scheme membership for them.

Employers need to keep this issue at the top of their agendas, particularly as we still expect a new regime to apply from as soon as April 2011. The Government intends to repeal the HIERC measures in the Finance Act 2010 before the summer recess (29 July 2010). However, the timetable for consulting on the replacement measures is unclear. In the meantime, the existing "anti-forestalling" measures, designed to discourage increases in pension savings by high earners in the run-up to April 2011, will remain in force.