Draft legislation, expected to be fast-tracked through Parliament this week, does not require any inflation-linked uprating of the income levels at which higher earners will be taxed on pension contributions from next April.
If the Government chooses not to uprate these thresholds the initial £130,000 cut off will be equivalent to around £100,000 by 2020, according to Towers Watson.
The Finance Bill 2010, published last Thursday, confirms a new “high income excess relief charge” will apply to individuals whose gross income is at least £150,000 if the value of any employer contributions or defined benefit pension accruals is included and at least £130,000 if this is excluded.
Towers Watson says the bill gives the Treasury powers to amend the rules by regulation and it could use these to increase the income thresholds but the bill does not introduce an expectation that these thresholds will rise with inflation each year.
The firm says an increasing number of people could expect to see tax relief on pension contributions restricted even if the thresholds did rise with inflation as earnings usually rise faster than prices.It says this “fiscal drag” will be more pronounced if thresholds do not increase at all.
Senior consultant Stephen Green says: “The Treasury has kept quiet about how or whether the income levels at which saving in a pension makes you liable for a tax charge will increase over time.
“The legislation leaves open the possibility that thresholds will rise, but if this was the Government’s intention we would have expected it to break its silence. As the Government looks for ways of putting the public finances in order, it may be tempted to keep the thresholds where they are and draw more people into the net in the same way as it has done by freezing the Lifetime Allowance for the next five years.”
Green adds: “The Government says 300,000 pension savers will be affected from next year. If it freezes the thresholds, this number could more or less double within a decade. Administering this tax is going to be expensive for pension schemes and employers, so they will not like the idea of the income thresholds being diluted through inflation.”