Grab the 40% pension tax break now, say advisers

Individuals earning around £100,000 are being urged to boost their pension contributions, amid fears that the Budget cut to higher-rate tax relief for people on incomes of £150,000-plus could be extended down the pay scale.

Those earning below £150,000 whose incomes rise above this level by 2011 already face being caught by the restriction in the pensions tax break, while some financial advisers suggest that upfront relief at 40 per cent – a key attraction of pensions for higher-rate taxpayers – could be scrapped for all.

“The message the Budget puts out is that higher-rate tax relief is at risk,” said Adrian Lowcock, senior investment adviser at Bestinvest. “There’s nothing to stop a chancellor bringing down [the income limit] to £100,000 or restricting everyone to basic-rate relief.”

Malcolm Cuthbert, partner of Killik & Co, added: “The only reason the government hasn’t gone further this time is because of the impact on Middle England, politically speaking.”

Advisers suggested that further limits on tax relief could be announced in the pre-Budget report in the autumn, particularly if government finances worsened. The restriction for individuals with £150,000-plus incomes could even be brought forward to 2010.

But, said experts, the Treasury is more likely to “take another swipe” at pension tax relief next year or beyond.

“Given the uncertainty, anyone eligible for higher-rate tax relief has very good reasons for maximising their contributions – you just don’t know how long the tax break will be around,” said Tom McPhail, head of pensions research at Hargreaves Lansdown.

“It’s ‘buy now while stocks last’,” added Michael Owen of Brooks Macdonald Financial Consulting. PricewaterhouseCoopers, the accountants, warned that even if relief was not cut further, “high fliers” earning £50,000 now could be among those hit by the Budget change.

Lowcock recommends boosting regular contributions. “This could sidestep future ‘anti-forestalling’ measures,” he said, referring to the Budget move to stifle tax relief on extra pension investments ahead of 2011 for those already earning £150,000-plus.

Advisers pointed out that investors putting more money into pensions currently would be buying in to stock markets at historically low levels.

Budget changes

● Reduction in higher-rate tax relief for individuals earning £150,000-plus from April 2011

● Tax relief tapered down to 20 per cent basic rate from 2011 for those earning more than £180,000

● 40 per cent tax relief for individuals already earning more than £150,000 is limited immediately to £20,000 annually or their “normal pattern of contributions”