Top-rate tax relief rumours dismissed

Higher-rate taxpayers have been advised not to take any special action after the government dismissed reports that it was considering plans to axe pensions tax relief for the wealthy.

Press reports in recent weeks suggested that Chancellor George Osborne was in talks to scrap pensions tax relief to individuals in the 40 and 50 per cent tax brackets – a move reported to save the Treasury £7bn.

Currently, individuals in these higher income bands can claim back relief on pension contributions at their highest rate.

But the Treasury has since said that rumours that it was considering limiting tax relief to 20 per cent, or the basic rate, were “absolutely not the case”.

“We ruled this out and set out alternative plans on pensions tax relief in the Budget last year, which we have since confirmed,” said the Treasury.

Speculation has resurfaced less than a year after the government reduced the annual cap on pension contributions from £255,000 to £50,000. The reduction was in contrast to the Liberal Democrats election manifesto to limit pensions tax relief to the basic rate and abolishing it for the very highest UK taxpayers.

In response to the reports Barclays Capital, industry analysts, said on Monday that the removal of higher rate relief would “arguably remove the most significant reason for investing in pension products [for higher earners], and would be highly damaging to pension sales.”

Many in the pensions industry believe it would not make sense for the government to axe higher-rate relief.

“Given that there are 4m higher rate taxpayers who have a higher proportion of voters [and Tory voters] than the general population, I think such a move would be political suicide,” said John Lawson, head of pension policy at Standard Life, the provider.

“There would be no advantage for any higher rate taxpayer to stay in a pension as ISA and offshore insurance bonds would become more tax effective if relief was cut to 20 per cent.”

Financial advisors said that it would be precipitous for people to take any special action based on the press report.

“It is highly unlikely there will be further changes to pensions tax relief in the short-term,” says Marc Hommel, partner with PWC, the accountants.

“After endless tinkering to pensions tax and regulation in recent years, and significant changes just introduced this past April, we’ve been all but promised a period of stability.”

However, with the government still looking for savings advisors say that investors should not be too complacent that higher rate relief won’t come under review in the future.

“If investors are concerned about the withdrawal of higher rate tax relief then they have the ability to put between £50,000 and £200,000 into a pension this tax year and get tax relief,” says Laith Khalaf, pensions analyst with Hargreaves Lansdown, the independent financial advisors.

“However in our opinion the Treasury are unlikely to withdraw this perk for the moment, particularly given the government is automatically enrolling millions of people into a pension from next year.”