High earners will benefit from maximising pension contributions

High earners in the UK are being urged to maximise pension contributions before the 50% tax relief disappears following Chancellor George Osborne’s announcement that the rate is temporary.

The tax relief available on contributions makes pensions one of the most tax efficient savings vehicles for UK individuals, according to the Alliance Trust Savings, one of the country's leading SIPP providers.

Currently, people receive tax relief on their pension contributions at their marginal rate. High earners who pay income tax at 50% could make a £50,000 contribution at a net cost to them of only £25,000. If the 50% tax rate was abolished a £50,000 contribution would cost £30,000, an increase cost of £5,000.

In the last two tax years individuals with an income in excess of £130,000 have only been able to receive tax relief on contributions up to a maximum of £30,000 each year. However, with the introduction of the revised annual allowance of £50,000 and the ability to carry forward any unused annual allowance from any of the three previous tax years, individuals will be able to contribute up to £200,000 into their pension pot in 2011/12. With tax relief available at 50%, this could be a saving of up to £20,000 when compared against relief at 40%.

‘The announcement by the Chancellor that the 50% tax rate is temporary will have been welcomed by many high earners. However, these individuals may not realise that they could benefit by up to £20,000 by maximising pension contributions before the 50% tax rate disappears,’ explained Steve Latto, head of pensions at Alliance Trust Savings.

The company's calculatiions are shown in the table below.