Tax relief on pensions is reduced

High earners will see the amount of money they can save into a pension drastically reduced next year, after the Treasury confirmed on Thursday a package of cuts to pension tax relief.

From next April, people will be able to save only £50,000 a year into a pension with tax relief, down from a current annual limit of £255,000.

Higher-rate taxpayers will also be allowed to keep tax relief at their marginal rate on pension contributions up to the £50,000 limit. There had been fears the government would restrict tax relief to 20 per cent for everyone.

The lighter-than-expected measures attracted relief from the pensions industry, who had lobbied for a higher contribution limit.

“The allowance of £50,000 allows the vast majority of people to save as much as they want, when they want,” said Andrew Tully, senior pensions policy manager at Standard Life.

However, consultants warned that the annual limit could hit people in final salary schemes with unexpected tax bills if they receive a pay rise, due to the way their pension benefits are calculated. People on earnings as low as £60,000 could be affected, depending on how long they have been in their final salary scheme.

The lifetime allowance for how much each person can pay into a pension will also be reduced from £1.8m to £1.5m, though this is not expected to come into effect until April 2012.

The coalition government’s proposals on pension reform replace those of the previous government, which had proposed limiting tax relief on contributions for people earning over £150,000.

The new measures were drawn up in response to complaints from the pensions industry that the previous proposals were too complicated.

“These new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable,” said John Cridland, deputy director-general of the CBI.

“Today’s announcement is not as bad as feared.”