Widespread relief after measured pensions tax reforms unveiled

Mark Hoban

Accountants, pensions experts and business groups have welcomed the government's stance on taxing pensions, after the coalition did not clampdown to the extent feared by some commentators.

Most significantly, the government held off from withdrawing high earners' access to claim higher-rate tax reliefs on their contributions.

The government will reduce the annual limit on tax-free pension contributions from £255,000 to £50,000 per year from 5 April 2011, and reduce the lifetime limit from £1.8m to £1.5m on 6 April 2012.

There had been fears that the annual limit could be reduced to a lower threshold.

John Cridland, CBI deputy director-general, said: "Today’s announcement is not as bad as feared. The government had considered making the annual allowance as low as £30,000.

“It is important now that the government appreciates the short timescale for implementation and works with companies to provide clarity.”

The Treasury estimates 100,000 people will be affected by the annual limit decrease, but it will still be an "ample" threshold for most people to build up a decent pension.

Tom McPhail, head of pensions research at Hargreaves Lansdown said: "This news is as good as can be expected and is a vast improvement on the tortuous system for restricting tax relief proposed by the previous government.

"We welcome the proposals to allow contributions to be spread over four years, however, it is clear from these reforms that everyone should now look on their pension allowance like their ISA allowance, as something to be used every year."

However, some accountants said the announcement would be a mixed blessing for some taxpayers.

George Bull, Baker Tilly's tax chief, welcomed the £50,000 threshold for annual contributions but raised concerns about the lifetime allowance decrease.

"News of the reduction of the lifetime allowance from £1.8m to £1.5m from 6 April 2012 is unwelcome.

"The reference in the Treasury statement to a further consultation on using pension funds to pay tax suggests that people with pension arrangements worth more than £1.5m at 6 April 2012 will suffer an unwelcome and potentially heavy tax charge."

Despite these concerns, high earners will still be encouraged because they can still offset the tax they pay on contributions through tax reliefs.

Param Basi, pensions technical director at AWD Chase de Vere, said: "We are really pleased that higher earners will still be able to claim higher rate tax relief.

"However, there are no guarantees and AWD Chase de Vere strongly encourages high earners, where they are able, to maximise pension contributions now."

Basi added that higher earners in final salary pension schemes needed to be very careful because the multiplier used to value their benefits has increased.

This means many scheme members need to be wary of possible tax charges, Basi warned.

Financial secretary to the Treasury, Mark Hoban MP said: "We have abandoned the previous government’s complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision."

Further reading:

Government could kill pensions tax scheme

Pensions tax shift will see FDs feel the pinch