From April 2011 the level at which higher rate tax must be paid will be cut, meaning the number of workers that pay 40% tax on income could increase by 700,000 to over 4 million.  

Currently, anyone earning £43,875 or above is subject to higher rate tax. Under normal circumstances, this level would rise with inflation to £45,360 as at April 2011. However, under the government’s projections this could be cut to £42,375 next year and be frozen until April 2014, meaning an increased tax bill year on year in ‘real terms’ for many workers.   

Member contributions to trust based pension schemes (excluding NEST) are made out of ‘gross pay’ meaning that individuals receive tax relief at their highest marginal rate (subject to ‘high earner’ limits).   

Member contributions to contract based arrangements (such as GPPs, Stakeholders and SIPPs) and to NEST will be made out of ‘net pay’ meaning that contributions are made after all taxes have been deducted. Whilst the pension provider may add back the basic rate tax upon receipt of the contribution, the individual policyholder will need to reclaim the additional higher rate relief annually in arrears via their tax return.   

However, if contributions are made on a Salary Exchange basis, the effect is that all individuals will receive full tax-relief at source (subject to ‘high earner’ limits) thus reducing their administrative burden and the delay in obtaining the full value of their contribution.