Hundreds of thousands of higher earners will effectively enjoy a tax cut after the chancellor took drastic action to tackle a pensions ‘tax trap’.

In March’s 2020 Budget, the government announced changes to pension tax rules affecting people paid more than £110,000 a year.

The move affects all high earners, and is likely to be welcomed by many of those who had feared the government might strip well-off individuals of their 40% pensions tax relief.

Many high earners, who bolster their salaries with shift-working, were worried their extra earnings would increase their pension pot by more than the maximum allowance, triggering an extra tax charge.

Rule changes introduced in 2016 meant many high earners faced unexpected tax bills linked to the value of their retirement pots. In the 2020 Budget the government announced changes to the complex rules relating to the “tapered annual allowance” that limits the amount high earners can pay into their pensions.

The Chancellor is increasing by £90,000 the threshold at which the system kicks in – a more generous change than most experts anticipated. At the moment, the rules start to bite when an individual’s “threshold income” (taxable earnings minus personal pension contributions) is above £110,000, and “adjusted income” (taxable earnings plus employer contributions) is above £150,000. Where both limits are breached, the annual allowance reduces by £1 for every £2 of income above £150,000.

To address this, from 2020-21 the threshold income will jump to £200,000, while the new adjusted income figure will be £240,000.

The Chancellor said that by doing this, he was “removing anyone with income below £200,000”.

The new rules mean that from the next tax year, if someone’s total income is £200,000 or less, after deducting any personal pension contributions, they will not suffer a reduced annual pension allowance, said Nathan Long of investment firm Hargreaves Lansdown.