Darling tipped to slash high earners' pension tax relief

Published on Saturday 20 March 2010 12:43

THE Chancellor looks set to resist opposition from the pensions industry by confirming plans to restrict tax relief for high earners when he delivers his Budget speech on Wednesday.

From April 2011, higher rate taxpayers will no longer be able to claim tax relief on pension contributions at 40 per cent, under government proposals set out last year. The pension relief available to those earning more than 130,000 a year will instead be gradually tapered to just 20 per cent for those earning 180,000 or more.

The plans have provoked angry protests from the pensions industry, with the National Association of Pension Funds describing the reform of pensions tax relief as "dangerous" at its recent investment conference in Edinburgh.

It called on the government to instead reduce the annual allowance – the maximum amount by which an individual's pension fund can grow each year before further increases are taxed.

Now Trevor Matthews, chief executive at Friends Provident, has added his voice to calls for the government to reduce personal allowances instead of targeting tax relief. He claimed that not only would reducing personal allowances produce the same revenue for the Treasury as cutting tax relief, it would also reduce the administrative complexity for employers.

"Pensions simplification attempted to reverse this trend but it now appears this strategy has been abandoned. We urge the government to adopt industry proposals, and remove the current uncertainty that is blighting pension planning," said Matthews.

But John Lawson, head of pensions policy at Standard Life, said he expected the Chancellor to confirm the government's proposals for high earners' pension tax relief.

"The consultation issued at pre-Budget was more like a statement of intent, so I expect this to be on the statute book pre-general election," he said. Lawson said the measure would result in high earners leaving pension schemes in favour of other tax-favoured savings. "No longer part of their pension scheme, these decision-makers are likely to dumb down the remains of the scheme for the average members that remain," he said.

Insurer Skandia believes that the government may tighten the restrictions on pension tax relief for high earners.

Colin Jelley, head of financial planning at Skandia, said: "With relatively few people actually earning more than 100,000, the Chancellor may consider it is worth risking losing their votes in return for recouping some additional and much-needed tax revenue."