Continuing in our series of questions linked to Financial Planning, this quarter’s question concerns Pensions and the latest change.

Question: I understand that the rules for those earning over £150,000 were substantially changed to dictate how much they could get tax relief on. Much of this centered around whether they had made regular contributions in the past. I have read this has changed again, but there have been so many changes to pensions, I am losing track. What do the latest changes mean?

Answer: What’s known as the "pension anti-forestalling provisions" were announced on budget day (22 April 2009) with immediate effect.

Let’s just look at these before continuing to the change:

These were put in place to prevent taxpayers from making artificially large pension contributions before 6 April 2011 in order to benefit from tax relief at 40% (or 50% after April 2010) before the rate of relief for higher earners is restricted. From April 2011, the amount of relief available will be tapered for individuals with income between £150,000 and £180,000 from 50% (the new higher rate for individuals earning over £150,000) to 20%, with only basic rate relief available where income exceeds £180,000.

The anti-forestalling rules will apply to those individuals with "relevant income" (total income before personal allowances, pension contributions, other reliefs and deductions, but after normal deductions and reliefs like trading losses, pension contributions up to a maximum of £20,000 and gift aid) of £150,000 or more.

The relevant income for the previous two tax years is also taken into account. If relevant income exceeded £150,000 in any of the last two tax years or the current year, restricted relief will still apply.

Where regular (quarterly or more frequently) pension contributions continue as previously made, the provisions do not take effect. Similarly, where excess contributions made do not exceed £20,000, there will be no restriction of relief. Where contributions do exceed £20,000 there will be a 20% tax charge in 2009/2010 to claw back relief received at 40%.

Now for the changes: Previously, only past pension contributions that were paid regularly were recognized. Now, annual and other contributions will also be recognized. The average of contribution in the tax years 2006/2007, 2007/2008 and 2008/2009 is compared to £30,000, and the earnings in 2008/2009. Whichever figure is the lowest is the amount on which relief will not be restricted. This is good for self employed people who often make lump sum payments rather than monthly or even quarterly however those making annual contributions in excess of £30,000 will still be at a disadvantage compared to those who make the same contribution on a monthly or quarterly basis.