The treasury has revealed that there are no current plans to alter the restrictions on pension tax relief for high-earning contractors. Contractors have discovered a way to work around this depending on your income bracket.
The pension simplification rules were introduced in 2006 and have been widely used by thousands of contractors to significantly reduce their tax bills. These rules allowed freelance workers to make ‘employer’ contributions up to £245,000 annually which was a very effective tax planning tool. The treasury is now planning to cap this tax relief at £20,000. This should come into effect by April 2011.
In order to prevent people trying to make the most of the current rules while they are still in effect, a set of interim restrictions has been applied.
If you have earned over £150000 from all income streams in the past two years or if you expect to do so in the tax year 2009/10, there is a special allowance that will cap what you and your company is allowed to pay into your pension fund.
However, high earning contractors who have been making regular pension contributions prior to 22nd April 2009 will be allowed to continue making these contributions at their existing level, even if these contributions exceed the £20,000 limit.
If you do fall into the higher earning category, you will still be able to make contributions over and above £20,000 but you will be personally responsible for the higher rate tax relief on any contribution made by you or for you. This reclaim of the twenty per cent tax relief will be made via self assessment tax returns.

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