Britain’s better paid may be victims of the economic downturn in tax terms but some could find consolation in the world of pensions where 60 per cent tax relief is on offer.

The pre-Budget report in December confirmed Chancellor of the Exchequer Alistair Darling’s clear intentions. Higher rate taxpayers will be the chosen section of the UK working population with whom he will raise taxes to raise additional revenues.

The same could have been achieved by raising National Insurance or increasing VAT but the chancellor took the view that the majority of the UK workers pay both these taxes. But the chancellor wanted to single out the higher rate taxpayer and he or she will face paying the highest personal tax rate in Europe next April.

The pre-Budget report in April last year introduced the new 50 per cent income tax band. At the same time a special annual allowance was introduced, the purpose being the restriction on higher rate tax relief on contributions up to £20,000 per annum or £30,000 if this was calculated as being an individual’s protected pension input amount.

This was aimed at individuals who had total income in excess of £150,000 per annum. Individuals in this income bracket and contributing in excess of the protected pension input amount will incur a tax charge of 20 per cent. Effectively this will mean they are just receiving basic rate tax relief on the contribution and this could be argued is still an attractive immediate return.

However in the pre-Budget report in December the chancellor reduced the qualifying total income from £150,000 down to £130,000 and therefore further restricting the number of individuals who would qualify for higher rate tax relief on their contributions.

From an advice perspective, every individual who falls into this category should be looking to take advantage of the current rules before the chancellor makes any more changes.

He has also targeted those individuals who earn in excess of £100,000 per annum. From April 6, for this section of the UK workforce the personal allowance will reduce by £1 for every £2 of income above £100,000.

The personal allowance for 2010-2011 remains at £6,475 and therefore will disappear altogether once income reaches £112,950.

The higher rate of income tax, 40 per cent kicks in on income over and above £43,875. With the introduction of the new personal allowance rules, a new tax rate will be created for individuals with income between £100,000 and £112,950.

For those earning £112,950 the new tax rate will be a whopping 60 per cent. For incomes between £112,950 and £150,000 the tax rate will reduce back to 40 per cent and increasing to 50 per cent for incomes in excess of £150,000.

The reason for this is gradual withdrawal of the personal allowance. You may even find you are paying 61 per cent rather than 60 per cent if all of your income is earned income as the extra one per cent National Insurance will affect you.

First impressions of the 60 per cent tax rate are ouch! But there are ways of avoiding this unwelcome scenario. Reading further into the detail, a pension contribution can be deducted from the salary as a way of reducing the level of income and therefore reinstating some of the personal allowance.

The best example is looking at individuals who earn £112,950 who would pay 60 per cent income tax on £112,950. However if they makes a pension contribution of £12,950 gross, the level of taxable income reduces to £100,000 at which point the personal allowance is recovered. The individual will receive 60 per cent tax relief on the pension contribution.

Therefore if you earn between £100,000 and £112,950, consider making a pension contribution. If possible make a contribution of £12,950 to benefit from this 60 per cent tax relief and recover the personal allowance as the net income will be deemed to be £100,000.

For individuals who fall into this category and are making personal contributions, consider speaking to your employer to discuss salary sacrifice.

This scenario, on the basis of an individual paying £12,950, could give you the benefit of 60 per cent tax relief and also a rebate of employer’s national insurance making the total contribution £14,607 for no extra monthly outlay.

If you can’t afford to part with that much money, any contribution to pension for individuals between these income limits should be considered so you get some benefits from the uplift in tax relief.

My final comment is in respect of the change in early retirement age to which I have made reference to in previous articles

I can see the headline that will be coming our way when April 6 arrives. “I’m 50 and now have to wait another five years to access my pension”.

The coming weeks offer the last chance for individuals between the ages of 50 and 55 to access their pension benefits prior to April deadline. Otherwise they will have to wait until they are 55.

They are ways of realising the entitlement to tax free cash, maybe to pay off a mortgage. However defer the requirement to take income until it is needed.

Trevor Law is a director with Montpelier Group (Europe), the privately-owned independent financial advisers located near Solihull. E-mail: