The financial services industry has come out in support of Treasury proposals to curb tax relief for high earners.
The measures, announced by Treasury financial secretary Mark Hoban last week, will see the annual allowance for pension saving reduced from £255,000 to £50,000 from April next year. Any pension contributions above £50,000 will be subject to a 55 per cent tax charge.
The lifetime allowance has also been cut from £1.8m to £1.5m, which will take effect from April 2012.
The Treasury has also heeded industry calls for a three-year “smoothing period”, a measure it hopes will prevent one-off spikes in contributions incurring a huge tax bill.
Under this proposal, the unused allowance from up to three previous years can be carried forward to offset against an excess contribution.
The Treasury says the reforms will impact on 100,000 people, 80 per cent of which have inc-omes above £100,000.
Hoban says: “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. We have taken a tough but fair decision. The coalition Government believes our system is fair, will preserve incentives to save and, compared with the last Government’s approach, will help UK businesses to attract and retain talent.”
Mattioli Woods sales and marketing director Murray Smith says the flexibility of the annual allowance represents “very good news” for Sass and Sipp savers. He adds: “It is a positive step on the whole – it is very good news for small businesses and I have never had clients that have consistently put anywhere near £255,000 into pension schemes on an annual basis.
“What they have is spikes in profit. They have quite volatile trading and it will be very helpful for them to be able to play catch-up on their contributions. It will allow us to carry on with quite a lot of planning around how pensions actually support small businesses.”
The Treasury says the reduction in tax relief payouts to higher earners will save the Government £4bn. Smith says figure seems “very optimistic”.
A consultation in November will look to address outstanding technical issues, including the treatment of savers who are close to the new £1.5m lifetime allowance limit and people whose savings fall between £1.5m and £1.8m.
Higher-rate tax relief proposals
- The annual pension saving allowance will be cut from £255,000 to £50,000 from April 2011
- Unused parts of the allowance may be offset over three years in an effort to prevent high tax charges in the event of a one-off spike in contributions
- The lifetime pension saving allowance will be reduced from £1.8m to £1.5m from April 2012
- The flat factor, used to calculate taxable income for members of defined-benefit pension schemes, has increased from 10 to 16
- People paying 50 per cent tax will still be able to claim relief at their full marginal rate