Thousands of people on middle incomes risk paying higher taxes after the government introduces sweeping changes to the pension system next year.
The new rules, set out in a government consultation paper this week, target middle income and high earners in final salary pension schemes.
The changes are also expected to hasten the closure of final salary schemes. Only one in 10 was still open to new members at the end of 2009, according to research by Aon Consulting.
Under the proposals from next April, workers’ pension plans will be subject to a far lower annual cap on contributions of between £30,000 and £45,000, down from the current £255,000.
The new threshold could affect anyone in a final salary scheme who gets a pay rise and has their pension benefits recalculated.
If the benefits go above the new annual limit, they will have to pay income tax on the excess value.
Older workers whose increased time in their company pension scheme are reflected in their benefits are particularly at risk.
The government admitted that “spikes” in the value of pension benefits could tip basic rate taxpayers above the new limits, adding that the subject was open for consultation.
The measures replace the previous government’s pension reform proposals, which were targeted at high earners on more than £130,000. Consultants warned that under the new rules, people on salaries of £60,000 or even lower could be hit with the extra tax charge.
“It will affect many more people on middle incomes,” warned Andrew Cawley at KPMG. “They’re spreading it over a much bigger group of people.”
Get alerts on Pensions crisis when a new story is published