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Warning that pension tax changes may not be index-linked

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.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Is this a surprise? Using fiscal drag as a stealth tax system has been a favourite of Brown’s for the last decade – this is just a continuation.

  2. I think that the Election selection will give an errection rejection. there is no way this will continue

  3. Robert Donaldson 6th April 2010 at 1:47 pm

    They will only be happy when they have destroyed the great pension savings culture that this country has had for decades.

    Litchenstein is looking more homely by the day!

  4. It is not before time that the tax relief granted to higher rate earners be restricted. Thank God we are away from the days of the ’70’ds when 60% tax relief was available Why does the Government not have the guts to restrict tax relief to the standard rate for all individuals and set the upper limit on the tax relief for the super earners!!!!!!

  5. Hendry Gordonson 6th April 2010 at 2:03 pm

    This election rejection will section the erection consession, I can’t see the government being up for that.

  6. correct, another steath tax in the making. Please get rid of this mismanaging shower and let someone with long term plans rather than knee jerk electorate panderings take the wheel.

  7. I assume Charles is being ironic?

    We all know that from 100k to 112k the marginal rate of tax is now 61% making pension contributions very appealing.

  8. Whilst I agree that excessive tax reliefs have been received by ‘High Earners’ the messages this sends out to the country is that saving in pensions is pointless as the Government keeps changing the rules. More people are turning to ISA’s – which they probably want as they fall into your Estate for IHT on death!

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