Since the coalition announced the scrapping of measures which would have seen those earning at least £150,000 lose some or all of their higher rate tax relief, we have been waiting with baited breath to find out what the alternative would be.

At last, we know that the government has gone for the simpler option of limiting the tax-free amount that can be contributed each year. From April 2011, the annual allowance for tax relief on pension contributions will be £50,000.

While this is a huge drop from the current limit of £255,000, it is certainly higher than the previously predicted allowances of between £30,000 and £45,000. In addition, unused relief from the previous three years can be carried over.

Another cause for celebration is the coalition’s rejection of the proposal to cap tax relief at 40 percent. The reduction of the lifetime allowance to £1.5 million is, however, not such joyful news, although those affected will have an extra year to plan as this is not being introduced until April 2012.

Anyone regularly contributing over £50,000 should consider making contributions up to the current annual allowance before next April’s plunge. However, it will not be possible to alter pension input periods (PIPs) and transitional rules apply from 14th October 2010 for PIPs ending in 2011/12.

If you have any questions, or for more advice and information, please contact us.