Darling poised to launch new attack on pensions tax relief

Published on Friday 4 December 2009 20:48

SPECULATION is mounting that the Chancellor is plotting a further attack on the higher-rate tax relief on pensions in his Pre-Budget Report next week.

In his April Budget, Alistair Darling unveiled plans to withdraw the higher rate tax relief on pension contributions for incomes over 150,000. Now there are rumours that he will abolish the relief outright for those earning over 100,000 a year or bring forward the existing restrictions a year from 2011 to next April.

Industry experts have hit out at the prospect of further restrictions and called for the changes to be dropped.

Isabel McGarvie, tax partner at PricewaterhouseCoopers Scotland, said: "I would certainly like to see the Chancellor reverse the higher-rate tax relief change. As it stands, I feel it could disincentivise people from saving into a pension in the UK. Pension schemes are the biggest investors in the UK stock market, so why would you get rid of the higher-rate relief?"

And Tom McPhail, head of pensions research at Hargreaves Lansdown, added: "Given the scale of the pensions crisis, any further restrictions to pensions tax relief would simply turn a difficult situation today into a disastrous one in the future."

McPhail said people earning more than 100,000 remained the easiest target for the Chancellor as he bids to plug holes in the public purse. "The Finance Act 2009 already places restrictions on those earning over 150,000; the government would simply need to go through this legislation crossing out the fives and replacing them with zeros.

"There is, however, the chance the government gambles on a more radical policy and abolishes higher-rate tax relief altogether."

The restriction on higher-rate tax relief may not be the only measure introduced in this year's Budget to be tinkered with in Wednesday's Pre-Budget Report.

Neil Whyte, tax investigations partner at PKF accountants and business advisers in Edinburgh, believes there is some potential for the income tax changes introduced earlier this year to be simplified.

Under the changes, announced alongside the proposed 50 per cent rate of income tax above 150,000, the personal allowance for those earning above 100,000 (currently 6,475) will be reduced by 1 for every 2 of income until those on 112,950 lose their allowance altogether.

But Whyte believes the Chancellor may pull back from the changes to the tax rate for those earning above 100,000.

Others concur, including Patrick King, tax principal at MacIntyre Hudson, who predicted that while the personal allowance for earnings over 100,000 a year may be restored, the new 50 per cent higher rate of income tax could apply to earnings over 110,000 a year.

"This quid pro quo would provide Darling with a cover to increase taxes on higher earners under the smokescreen of simplifying the position over the personal allowance," said King.