The coalition Government have announced that pensions tax relief is to be limited to contributions for under £50,000 per year.
This represents an eighty percent cut from the previous annual tax free threshold of £250,000 and is expected to recover an additional £4billion a year in additional tax revenue.
The £50,000 tax free contribution will include payments from both the employer and the employee. This is only likely to affect high earners as most working adults do not normally fund their pensions at these levels, which is almost £1000 per week.
The tax payable for pension contributions over £50,000 will be payable at the tax payers highest rate, which is likely to be 40 or 50 percent, given the high salaries that are likely to be commensurate with these pension contributions.
In addition the size of the total pension that can be accrued without being taxed, will fall from £1.8million to £1.5million.
Some tax planning will be possible as any unused annual tax allowance inn one year can be carried over to the following three years.
These changes, which come into effect on 6th April 2011, reverse the plans made by the previous Labour Government who were proposing to restrict pensions tax relief for those earning more than £130,000 per year.
There appears to be approval from some experts within the pensions industry, who welcome the simplification of pension taxation that these changes represent.
For example Andrew Tully, Senior Pensions Policy Manager, at Standard Life said:
“I welcome the Government’s move to replace the exceptionally complex changes which were due to be introduced from next year. An annual allowance works in the same way as ISA limits so is simple, clear and easy for people to understand.”
“The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want. This change means pensions will continue to be an attractive home for long-term savings, retaining the unique advantage of an upfront tax incentive from the Government.”