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Tax relief on pensions capped at £50,000

15 October 2010

The annual allowance for tax relief on pension contributions is to be cut dramatically, from £255,000 to £50,000, which the Treasury hopes will eventually save more than £4bn per year. The cap is more generous than the £30,000 or £40,000 predicted by many.

The Treasury is also expected to reverse the previous Labour administration’s decision to reduce to 20% the tax relief on pension contributions made by higher rate taxpayers. Though the question is still out for consultation, the Treasury’s figures suggest that keeping tax relief at 40 or 50%, while introducing the £50,000 annual contribution cap, will be broadly revenue neutral.

Industry has given the announcement a mixed welcome.

Eleanor Daplyn of the law firm Sacker & Partners expressed concern over the pressure the timing of the change would place on advisers.

“Our main concern is on timing. Even the Government acknowledges that to introduce the changes from April 2011 represents ‘a stretching timetable’. However, it seems the need to make the estimated £4bn saving that the tax changes would deliver is paramount. It is a big ask for the whole industry to adapt to yet another new tax regime in under six months,” she said.

Marc Hommel, pensions partner at PwC, commented: "The new tax limits announced this morning are towards the less onerous end of the ranges previously suggested, and fewer people will be impacted than many feared. The current Government estimate is that 100,000 people will be affected but, as there is no current intention to increase the tax limits, many more people could be caught in future years particularly if inflation takes off.”

PKF’s Neil Whyte pointed out that, while the new regime offers simplicity, the transitional rules may present problems for the unwary.

“These rules will be simpler for most as the maximum pension contribution that you can pay and get tax relief on will be set at £50,000 and tax relief will be given at your top rate – not hugely different from the rules prior to ‘A day’ (6 April 2006). However, just like the last Chancellor, George Osborne could not resist introducing some transitional rules that take effect from today and will make matters very complicated for some individuals making large annual contributions,” he said.

John Cridland, CBI deputy director-general, also gave his qualified support.

“Today’s announcement is not as bad as feared. The Government had considered making the annual allowance as low as £30,000,” he said. “It rightly heeded warnings about the impact that restrictive regimes can have on pension saving, and these new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable. We particularly welcome the Government’s commitment to consult on how to proceed with changes to the lifetime allowance, and to consider delaying this change until 2012."

Param Basi, pensions technical director, AWD Chase de Vere, strongly supported the announcement, particularly the suggestion that higher rate tax relief on contributions will be retained.

Mr Basi said: “We are really pleased that higher earners will still be able to claim higher rate tax relief. This was a potential opportunity for the Government to reduce tax relief and the fact they haven’t suggests that existing levels of relief will be retained in the coming years. However, there are no guarantees and AWD Chase de Vere strongly encourages high earners, where they are able, to maximise pension contributions now.”

James Abbott, a tax partner with Baker Watkin, was less enthusiastic.

“I have to say that simplicity doesn’t always bring fairness and this will be costly to the UK’s business people who can’t always make regular contributions,” he compained. “The average business person will have put their own pension provision on the back burner to help support their business through tough times, ready to be the engine of economic growth going forward.”

Brendan Barber, General Secretary of the TUC, agreed the changes would not deliver a fairer pensions regime, but for precisely the opposite reasons.

“The Government is right in principle to limit pensions tax relief for the high paid… But this is a big missed opportunity. What we need is a much more serious discussion of pensions and tax relief. At present it costs a higher rate taxpayer just 60p to put one pound into their pension because they get 40p tax relief. But a standard rate taxpayer – the real middle income Britain – gets only 20p relief, so it costs them 80p to save one pound.”