Employers need to warn higher-paid employees to exercise caution before increasing, or varying, their level of pension contributions over the next two years or face possible severe tax penalties, according to consultants Watson Wyatt.
 
Employers in the £150,000 per year bracket and in particular those with income between around £100,000 and £113,000, could profit from increasing their pension contributions from next tax year, if this would bring their taxable income down to £100,000 or less.  
 
The Budget in April cut tax relief available on pensions for earners of over £150,000 from 2011. However, anti-forestalling measures to avoid high earners treating the next two years like a closing down sales for pensions mean that higher earners could face tax penalties if they alter their pension contributions.
 
But the graduated removal of personal allowances for those with annual income of more than £100,000, also announced at the Budget, means that from April 2010, people just into the six figure income bracket may effectively gain more than 40% tax relief on additional pension contributions.  
 
Mick Calvert, head of the financial planning group at Watson Wyatt, says: “Pension planning for high earners is going to be very messy over the next couple of years and the knock on effect could become a headache for HR teams if employees take decisions that backfire.

“Defensively, employers might want to consider providing those earning over, say, £100,000 a year, with some generic information about the need to take financial advice before making any significant changes to their pension arrangements.”