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UK Budget cuts higher rate tax relief (updated)

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UK - Alistair Darling, chancellor of the Exchequer, has confirmed tax relief on pension contributions for high earners will be reduced from 40% to 20% from April 2011.

In his Budget speech, Darling told MPs that it was important to encourage retirement saving but said the government needed to "address an anomaly" in the tax relief system that sees a "tiny proportion at the top" receive the most in tax relief.

He said: "It is difficult to justify how a quarter of all the money the country spends on tax relief goes, as now, to the top 1.5% of pension savers."

As a result, he confirmed those people earning over £150,000 a year will see a gradually tapered reduction in the level of tax relief from April 2011, from 40% to the standard rate of 20%. 

He confirmed the government will consult on the implementation of the change, but warned "measures to prevent forestalling" of the reduction will be introduced from today.

These will only affect individuals with incomes of £150,000 or more if they change: 

The normal pattern of regular pension contributions to a money purchase scheme; The normal way in which pension benefits are accrued in a final salary scheme, or If their total pension contributions/accrued benefits exceeds £20,000 a year.

HM Treasury confirmed a new and additional "special annual allowance and associated tax charge" will be introduced in the Finance Bill 2009, and under any of the three specified situations the individual will trigger the tax charge that will have the effect of "restricting tax relief on the additional pension savings to basic rate".

These special measures will apply to "total contributions, regardless of whether these are made by the individual, their employer or by a third party", and will run alongside the existing annual allowance - increased to £245,000 in 2009-10 - and its associated tax charge.

Rachel Vahey, head of pension development at Aegon UK, said the decision "undermines the A-day agreement", which was implemented in 2006 and was designed to promote long-term pension saving while using the standard Lifetime Allowance to prevent abuse of the system by the wealthy.

She said: "That major overhaul of the pensions tax rule was meant to last 30 years rather than three years. Pensions are for the long-term so consistency is essential to give people confidence to plan for the future."

Vahey said while reducing tax benefits "may seem a relatively easy way of raising cash" the changes could lessen trust in the system.

"We can't afford a vicious circle of less engagement with pensions leading to increased temptation for politicians to cut their value. Pensions are still a good deal but the more the government alters the rules the less trust people will have in pension saving going forward. Boosting pension saving will not only help the economy in the long term, it is one of the best ways of securing an income in retirement for our ageing population," she added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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