The catchline for the UK TV campaign encouraging citizens to fill in a self-assessment tax return in time is ‘tax doesn’t have to be taxing’. Unfortunately, this doesn’t apply to the latest HM Revenue & Customs changes to the tax relief on pension contributions.

In the UK, pension contributions have traditionally had tax relief at the highest marginal rate paid by an individual, currently 40% for higher rate tax payers.

This meant complex restrictions on how much could be paid into a pension, as though locking away money for many years and then having to purchase an annuity was an attractive wheeze for the wealthy. Eventually the authorities saw the light and radically simplified the system in 2006; annual contribution limits shot up, in return for an overall cap on pension saving.

Now, with the government desperate to raise revenue in order to repair the gaping hole in public finances, the tax relief on pension contributions from higher rate tax payers has become a politically acceptable target.

Last April, the government announced that individuals with incomes over £150,000 would be restricted on their pension contributions and now this limit has been reduced to £130,000, capturing another 300,000 individuals in its net.

Although the number of people may be relatively small, the consequences could be far-reaching. Senior executives could become less concerned about the fate of their company pension schemes, hastening further closures, as their direct interest in them is weakened.

The additional work for pension administrators would be another cost and burden on employers. And with the erosion of the principle of tax relief on pension contributions at the highest rate, the door is open for further tax grabs in the future, if the income limit is reduced to £100,000 or below.

The way the rule change is being implemented is also causing concern. HM Revenue & Customs has said that if an individual has regular, monthly contributions these will still get tax relief at the highest rate. But one-off, annual contributions will not be protected.

To illustrate this, imagine two well-off individuals. One pays £5000 a month in pension contributions and has done for some time. In this case, tax relief at 40% continues. But the second individual, paying £60,000 a year in one go, will now only get tax relief on £30,000 of this contributions. This limit would have been £20,000 but was increased in a concession after lobbying.

So the rule change will hit the self-employed and small business owners harder than those in employment, as these people are more likely to make annual contributions once they have calculated their annual profit or loss.

Final salary schemes could also be disadvantaged. With money purchase schemes, it is easy to see the size of pension contribution, but this is not the case for final salary schemes. Instead, the government uses a 10:1 ratio, meaning if an individual’s final salary benefit rises by, say, £1000 in a year, they are deemed to have a contribution of £10,000 made on their behalf.

This ratio favours older members, as such an increase might cost £20,000, whereas it might only cost £5000 for younger members with longer time horizons.

The government is to review this approach and favours an age-related formula, which, as the membership profile at closed final salary scheme membership grows older, will lead to higher deemed contributions and hence a larger tax take. It could also lead to the frankly bizarre prospect of deferred scheme members getting a tax bill for a future pension benefit relating to a company scheme at an employer they left some time ago.

Rather than saying ‘tax doesn’t have to be taxing’, perhaps the new approach should be more on the lines of ‘tax doesn’t have to make much sense, you just have to pay it’.