Pension tax relief warning

Wealthy pension investors are being advised to make their contributions for the new tax year now as the valuable higher rate tax relief could be under threat.

Pension contributions of up to £245,000 per year qualify for full income tax relief, so investors who pay higher rate tax save 40 per cent. But advisers fear the government could remove the additional benefit for high earners in the Budget on April 22, capping pension tax relief at the basic rate of 20 per cent. This may be offset by an increase in the annual contribution allowance to individual savings accounts (Isas).

While there is no certainty that any change will be made, advisers are more concerned than they have been in previous years that the tax relief may be reduced.

Adrian Boulding, wealth policy director at Legal & General, feels the higher rate relief is “particularly at risk this year” because of the pressure on public finances and also the backlash against bankers’ excessive pensions.

“A number of high-profile bankers have left with very generous pensions and there is a real risk that public indignation over this could lead to an attack on higher rate tax relief enjoyed by ordinary people,” he said.

Killik & Co, the adviser, is writing to clients suggesting they make payments to their pensions as soon as possible to ensure they qualify for the higher rate relief. However, the Budget will be announced on April 22 – more than two weeks into the start of the tax year – so it is unlikely that any change to the tax benefit would be backdated.