Trevor Law: Pensions in need of relief
Aug 20 2010 By Trevor Law
Restricting pension tax relief has been around a long time featuring on the agenda of the previous Labour government’s chancellors of the exchequer as well as the new coalition government.
The current status quo is the anti-forestalling rules introduced by the last Labour chancellor Alistair Darling in the budget of April 22 last year to cut back pension text relief for high earners that were subsequently amended in the budget of December 9.
The new government has confirmed that these rules will remain until April 2011.
However at the same time it has acknowledged the complexity of the rules introduced in April 2006 and the reality that the “Pensions Simplification” title given to the subsequent anti-forestalling rules couldn’t be any further from the truth.
Pensions legislation is a statutory minefield and the Conservative/Liberal coalition has made it clear a review to simplify the legislation is necessary.
They haven’t wasted any time and the publication of the recent document by HM Treasury titled Restriction Of Pensions Tax Relief: A Discussion Document On The Alternative Approach is clear evidence that the review is underway.
The government will seek to ensure it raises at least the same amount of revenue through restricting pensions tax relief as has already been accounted for in the public finances from last April’s Finance Act 2010 measured over the forecast period and beyond.
Provisional analysis suggests the intention is to remove tax relief on pension contributions above an annual allowance in the region of £30,000 to £45,000 and this might deliver the necessary yield. I suppose the fact that it is not to be abolished completely is welcome news considering that if the Liberal Democrats were voted in their election manifesto included higher rate tax relief for pension contributions to be abolished in its entirety.
There are various scenarios individuals making significant pension contributions need to consider. The Government envisages the allowance would be set at a flat rate ie it would not vary by age or scheme type.
It also seems to be discouraging pension funding beyond the new limit by the way of no tax relief on contributions in excess of the annual allowance irrespective of an individual’s income tax band.
In addition, restricting tax relief to 40 per cent is suggested rather than individuals receiving tax relief at their marginal rate. This would further reduce the tax relief available to high earner taxpayers paying the 50 per cent rate and therefore raise more revenue.
Clearly what is planned is a big reduction in pension funding opportunities compared to those introduced through pension simplification in April 2006 that allowed an individual to fund up to 100 per cent of earnings in a scheme and employers to pay up to £255,000 per annum.
