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Tax relief on pensions is reduced Tax relief on pensions is reduced
(40 minutes later)
The amount of tax-free income that savers can put into pensions has been sharply restricted by the government.The amount of tax-free income that savers can put into pensions has been sharply restricted by the government.
The annual limit will be reduced from £255,000 to £50,000 in April.The annual limit will be reduced from £255,000 to £50,000 in April.
Experts say that many people with long service in final-salary pension schemes could face unexpected tax bills as a result of modest pay rises. Experts have warned that some people with long service in final-salary pension schemes might face unexpected tax bills.
The Treasury hopes the changes will eventually save it more than £4bn a year - which could be used to reduce the budget deficit.The Treasury hopes the changes will eventually save it more than £4bn a year - which could be used to reduce the budget deficit.
The lifetime allowance on money that can be built up in a pension fund and receive tax relief has also fallen from £1.8m to £1.5m from April 2012. The lifetime allowance on money that can be built up in a pension fund and receive tax relief has also fallen from £1.8m to £1.5m, but from April 2012.
High earners will continue to be paid tax relief on pension savings at the highest rate at which they pay income tax.High earners will continue to be paid tax relief on pension savings at the highest rate at which they pay income tax.
The coalition government began a consultation after the Labour government announced plans to gradually reduce the tax relief available on pension contributions for people earning more than £150,000 to just 20%, despite the fact that these people pay income tax of 50%.The coalition government began a consultation after the Labour government announced plans to gradually reduce the tax relief available on pension contributions for people earning more than £150,000 to just 20%, despite the fact that these people pay income tax of 50%.
NumbersNumbers
The government said that changing the allowance to £50,000 would affect 100,000 pension savers, and 80% of those had incomes of more than £100,000 a year. The government said that changing the allowance to £50,000 would affect 100,000 pension savers a year, and 80% of those had incomes of more than £100,000 a year.
Someone who puts more than £50,000 into a pension in one year will also be able to offset this against their allowance from previous three years. Someone who puts more than £50,000 into a pension in one year will also be able to offset this against their tax-free allowance from the previous three years.
However, the rate at which increases to the pensions accrued in defined benefit schemes will be valued is also to be put up, meaning some workers, particularly high earners who receive significant salary increases, may face tax charges. This will help people avoid a tax bill if they put more money into their pension scheme as a result of being given a one-off payment, such as a redundancy payment.
"We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes," said Mark Hoban, financial secretary to the Treasury. However, the formula for calculating the increase in someone's pension if they are in a defined benefit scheme will become more aggressive.
"We have taken a tough but fair decision. The increase in accrued pension will be multiplied by a factor of 16, not 10 as at present.
"The coalition government believes that our system is fair, will preserve incentives to save and - compared to the last government's approach - will help UK businesses to attract and retain talent." So someone whose pension entitlement increases by more than £3,125 in any one year can expect to pay tax.
John Cridland, deputy director general of the CBI, said: "The announcement is not as bad as feared. The government had considered making the annual allowance as low as £30,000. Mark Hoban, financial secretary to the Treasury, said the government had taken a "tough but fair" decision.
"It is important now that the government appreciates the short timescale for implementation and works with companies to provide clarity." "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes," he said.
George Bull, head of tax at Baker Tilly, said: "Once the new limit is in force, we urge the government to refrain from future tinkering in order that people can have confidence about their own pension planning." 'Vast improvement'
Experts immediately pointed out some important wrinkles in the government's plan.
Tony Baily, at pension consultants Aon Hewitt, said: "The higher than previously proposed annual allowance and a relatively low valuation factor mean that the winners are long-serving, middle-income earners in defined benefit plans, many of whom will now not be affected by the annual allowance.
"The losers are high pension savers who get caught by the reduced and frozen lifetime allowance," he added.
Marc Hommel, pensions partner at PwC, said: "As there is no current intention to increase the tax limits, many more people could be caught in future years particularly if inflation takes off."
Ronnie Ludwig, a partner at Saffery Champness, said the new policy would discriminate against entrepreneurs.
"Because it is based on the model of regular income and regular pension contributions, it effectively discriminates against the self-employed or small business owners whose income patterns are more uneven," he said.
Tom McPhail at investment advisers Hargreaves Lansdown said the limits would still allow most people to build up a decent pension without incurring extra tax bills.
"This is a vast improvement on the tortuous system for restricting tax relief proposed by the previous government," he said.