The pension tax relief changes explained and who they affect

The amount of income that can saved into pensions is to be severely restricted.

Today the Treasury announced the coalition government’s overhaul of Labour’s previous pension proposals which included a High Income Tax Relief Charge as well as complex tapering of tax relief for people earning between £150,000 and £180,000.

So what are the coalition government’s proposals ?

• The annual limit (the maximum amount which you can pay into a pension and receive tax relief) is to be reduced from £255,000 to £50,000. This limit will not increase in line inflation until 2016 at the earliest.
• It will, however, be possible to offset contributions in excess of £50,000 against unused allowances from previous years under a three-year carry forward provision.
• Income tax relief on pension contributions will be at pension savers’ highest marginal rate. This includes 40% and 50% income tax payers.
• The lifetime allowance will be cut from £1.8 million to £1.5 million in April 2012.
• Concessions so that historical benefits of members of final salary schemes are revalued to take account of inflation before the new rules are applied. This is because when final salary members receive a pay rise their historic benefits increase in value. Consequently without some form of concession final salary members would be hit by a tax charge when they simply receive an inflationary pay rise.

When we will they take effect?

The restriction on pension tax relief will take effect from 6 April 2011. As stated above, the change to the lifetime allowance will take place in 2012.

Having said this ‘the Government has announced that pension saving done from today will count against the £50,000 annual allowance, rather than the current £255,000 limit, where pension input periods end in 2011/12’ according to This is Money. But this is a very specific situation and would not affect most people.

Why are have they made the changes?

The primary aim is to save the Treasury more than £4bn a year to help repay the UK budget deficit.

How many people will be affected by the changes?

Apparently the tax relief restriction will affect 100,000 pension savers a year

Who are the biggest losers?

The pension industry is still digesting the announcement but on the face of it high pension savers will be the biggest losers. Of the 100,000 pension savers rumoured to be affected 80% of these earn more than £100,000 per annum.

However, under Labour's proposals people earning in excess of £180,000 per year would only have received 20% tax relief on any pension contribution made from 2011 onwards, no matter how small. Under the new proposals it would appear that they too can get tax relief at their highest marginal rate (50%) on pension contributions up to £50,000. This makes pension funding attractive to this group of people once again.

The people who will be less than happy are those who earned and saved between say £50,000 and £130,000 per annum into pensions as they will no longer be able to get full tax relief on this level of pension contribution. Full tax relief will be restricted to the contribution limit of £50,000 per annum only.

The majority of pension savers, who obviously save less than £50,000 a year into pension, will likely not notice any difference.