New cap for tax relief on pensions

The amount that people can add to their pension funds and on which they can receive tax relief is to be reduced.

The Treasury has confirmed plans to reduce the annual limit from £255,000 to £50,000.

The government hopes that the change will in time save as much as £4 billion.

Also to be reduced is the lifetime allowance on money that can be saved in a pension fund for which tax relief is allowed. This will come down from £1.8 million to £1.5 million.

The government has estimated that the change to the annual allowance will affect some 50,000 savers of whom 80 per cent will be earning over £100,000.

Higher earners will, however, retain the benefits of tax relief at 40 per cent and 50 per cent. The previous government had proposed tapering pensions tax relief for those earning more than £150,000 to 20 per cent, plans which have now been dropped.

The new annual allowance comes into effect as from April 2011; the new lifetime allowance from April 2012.

To protect individuals who exceed the annual allowance due to a one-off ’spike’ payment, the government is to allow them to offset this against unused allowance from previous years.

Having announced in the June Budget that it would be reforming the tax system with respect to pensions saving, the government consulted over the summer with various pension professionals, industry bodies and employers.

The original discussion document proposed reducing the annual allowance to between £30,000 and £45,000.

However, the government said that targeting the lifetime allowance as well as the annual allowance has meant it has been able to set a £50,000 limit.

Mark Hoban, the Financial Secretary to the Treasury, commented: “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 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.”

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