High earners face pension charge

The move has not been seen before with company pension schemes

People with a taxable income of more than £150,000 will pay tax on their employer's contribution to their company pension scheme from 2011.

The Treasury has confirmed the plan, which was contained in the detail of Chancellor Alistair Darling's Budget.

The move is a blow to high earners who are also set for a reduction in tax relief on their own contributions.

Mr Darling said it was an "anomoly" that very few workers took a large slice of the government's help.

Detail

Under the current rules, both employers and employees can claim tax relief on their contributions to company pension schemes.

The proposals can only lead to further complication and expense ... at a time when the pensions industry faces more than enough challenges already

Eleanor Daplyn, Sacker & Partners

In the Budget, Mr Darling announced that from April 2011, the highest earners will see their 40% tax relief restricted.

People earning up to £150,000 will get 40% tax relief, but the relief will be tapered down to 20% for those with a taxable income of £180,000 - the same as a basic rate income taxpayer.

In the published detail, a key phrase reveals "this restriction applies to all contributions, including employers".

So, the highest earners will be liable for a tax charge on their employer's contribution to their pension scheme. This currently goes into a pension pot effectively without any intervention from the employee.

The employee still pays income tax when this pension is drawn on retirement.

The total restriction on tax relief is set to make the Treasury £200m in 2011-12, followed by £3.1bn in 2012-13.

Eleanor Daplyn, associate at pensions lawyers Sacker & Partners LLP, said: "The government has said it will be consulting on how the changes will apply to pension savings made by employers on behalf of their employees, but this feels a bit like shuffling deckchairs on the Titanic.

"Legally, the proposals can only lead to further complication and expense for trustees and employers alike at a time when the pensions industry faces more than enough challenges already."