High earners could lose as much as £13,500 in tax relief in the budget as signs suggest the chancellor is planning a raid on the pension pots of those earning over £150,000 a year.
At the moment, anyone making pension contributions gets tax relief on them at their marginal rate (between 20% and 45%). In their pre-election manifesto, the Conservative party promised that if re-elected they would restrict pension contribution allowances for those earning over £150,000.
There has been growing speculation about how this would be done and when it would be introduced.
On Wednesday the government posted a briefing paper about restricting pension tax relief on its website (pdf), which industry experts believe increases the chances pension pots will be targeted.
“We were fairly sure that there would be a tax relief change in the budget and this has increased the chances greatly,” said Tom McPhail , head of pensions at financial advisers Hargreaves Lansdown.
“Our great concern is that the government will simply cap tax breaks for higher earners. This would do nothing for the vast majority of the population except make the pension system marginally more complicated than it already is.”
The government has previously said its favoured approach is to hit pension tax relief by progressively reducing the annual allowance at a rate of £1 for every £2 earned over £150,000, until it hits £10,000.
At present, anyone contributing to a pension is entitled to tax relief on contributions of up to £40,000 a year.
“The potential cost to someone earning £210,000 or more could be £13,500 in lost tax relief,” McPhail said.
There has been mounting criticism of this policy with some, including former pensions minister Steve Webb, calling for a flat rate tax relief for everyone of 33%. This would benefit lower earners who contribute to their pension while at the same time reducing relief for the very highest earners.
Speaking at a recent industry event Webb described the government proposals to taper tax relief for those who earn between £150,000 and £210,000 as “bonkers”.
“Think through the logic,” he said. “Say they do it from 2016-17. So it is the amount you earn in 2016-17 that determines your annual allowance in 2016-17, but at the start of 2016-17 you don’t know what you are going to earn in 2016-17.
“So presumably they wait till you have your tax return which you’re filing in January 2017-18, then they finalise your income for 2016-17 in the spring of 2018. Then do they decide your annual allowance after all in 2016-17 was £10,000 not £40,000? That would be ludicrous.”
It is thought that on Wednesday the government may also publish initial statistics on the take-up of the Pension Wise service, which has been running since April to offer guidance to people over 55 considering taking their money from their pension pot under the new pension freedoms.
The Financial Conduct Authority has said that of calls made by savers to their pension providers about the changes, 16% are being abandoned by consumers.
