While some pundits are relieved the Budget measures to cut tax relief enjoyed by the highest earners were not as far reaching as had been feared, the general reaction was still outrage.
In a nutshell, the changes, which come into play from April 2011, will see the tax breaks on contributions made by those earning over £150,000 in total income, not just salary, gradually shrink from 40 per cent so that people on £180,000 or more get the basic rate of 20 per cent.
But Chancellor Alistair Darling has been cunning and quashed the possibility of a buy-now-while-stocks-last rush to get cash in before the new rules take effect.
And he has done it in an extremely convoluted way.
The forestalling measures, put simply, involve limiting tax relief as of yesterday for people who have earned over £150,000 in this and any of the previous two tax years, unless the contributions are less than £20,000 or have been regularly above this amount.
Darling has also effectively killed off the chance of using salary sacrifice to get around the changes because the so-called special allowance includes employer contributions as well as employees.
Darling says the move will earn the Treasury £3.1bn or about half of what they dish out on higher rate tax relief at the moment. It is expected to whack upwards of 225,000 people, according to Standard Life.
Hargreaves Lansdown pensions analyst Laith Khalaf says the proposal will see the highest earners snub pension savings in future.
He says: “This measure will cause huge upheaval for employers, advisers and pension providers and will ultimately lead those earning over £150,000 to seek alternative vehicles for their retirement savings.”
Kohn Cougar managing director Roddy Kohn agrees but believes the move will have more sweeping consequences.
He says: “High-net worth individuals will not be as easily persuaded that it is in their best interests to continue making pension contributions because even with tax relief at 40 per cent many of them harped on about their lack of access to capital so at 20 per cent the incentive is not there.
“I also think the move will harm pensions in general because the message that most people will take home is that pensions are not as good a tax break. It is colouring the whole public perception as to whether pensions are good value or not even though this only applies to higher earners.”
Association of Independent Financial Advisers director general Chris Cummings says: “The decision to immediately limit additional pension contributions from higher earners risks jeopardising the sensible savings plans of wealth creators. Although this is restricted to a small group of people it is a worrying and complicated step from the Government. And at such a short time after A-Day it can be seen as a short-term response instead of long-term thinking.”
Meanwhile, pensions expert Ros Altmann slammed the Government for not using the money skimmed off pensions to boost the retirement provisions of poorer people.
She says: “The Government claimed this Budget was about fairness but this measure is not about farness, it is about raising money. Fairness would mean using the revenue raised to help other people achieve better pensions.
“I could support that and have sympathy with the view that top rate tax relief could be better targeted by improving incentives for ordinary people but this proposal amounts to taking money away from pensions and not putting anything back. This measure will merely tinker at the edges and add more complexity without any benefits.”
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