The move to cut the tax relief offered to those on top incomes was greeted with a blend of public indignation and relief that the moves were not as sweeping as many had feared.
From April 2011, those on incomes of £150,000 ($216,907) to £180,000 will see their tax relief tapered from the current highest rate – now 50 per cent – down to the current basic tax rate of 20 per cent. That means that a contribution of £100 that would have yielded a tax rebate of £50 will now see that tax break cut to as low as £20.
Marcus Hurd, head of corporate solutions at Aon, the benefits consultancy, described the move as an “attempted ransack” of pensions. “Today’s Budget announcement that the government is scrapping higher-rate income tax relief on pension contributions is likely to backfire and be ineffectual,” he said.
Chancellor Alistair Darling framed the move in the context of fairness. “It is difficult to justify how a quarter of all the money the country spends on pensions tax relief goes, as now, to the top 1½ per cent of pension savers.”
Indeed, the Pensions Policy Institute, using data from the 2004-05 tax year, calculated that in that period, roughly £5bn went on tax relief for higher earners, equal to about 60 per cent of all tax incentives to individuals to encourage pension savings.
On Wednesday, pensions specialists at Standard Life estimated that about 8 per cent of those paying higher tax rates were affected, a total of about 291,000 people.
The government promised a consultation on the measure before it was implemented, although it also put in place rules aimed at discouraging people from stuffing large contributions into their pension scheme to benefit from tax breaks now.
Joanne Segars, chief executive of the National Association of Pension Funds, an employers’ group, on Wednesday expressed relief that the changes were not more sweeping.
“We are pleased that rumours the government would abolish higher-rate tax relief – which is an important incentive to save for millions of people – were unfounded,” she said.
Matt Wakefield, senior research economist at the Institute for Fiscal Studies, said that the measures may erode general confidence that the government intended to encourage savings for retirement because the tax treatment had been changed several times in recent years.
Still, Raj Mody, pensions partner at PwC, said the measures may not be quite as sweeping as they appear, even for the well paid. For one thing, those on very high pay often receive a large percentage of it in the form of a bonus which is typically not pensionable in most employers’ schemes.
However, it will force employers to consider very carefully the way they remunerate their highest-paid staff and encourage some to restructure their benefits offering, he said.
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