Money Talk: Gordon's top target

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ALTHOUGH Tony Blair and Gordon Brown gave a solemn pledge to keep the top rate of tax at 40p in the pound throughout the present parliament, no one pretends that the Chancellor will not try and take more money off the rich in other ways. The most obvious target would be to stop allowing top-rate taxpayers tax relief on pension contributions at 40p in the pound while standard-rate taxpayers only get back 23p.

Pensions providers and managers argue that because pensions are taxed at the going rate when they are paid, with rich pensioners paying the top rate of tax, relief should continue to be available at the top rate on contributions. Anything else would be unfair, especially as the Inland Revenue has no way of taxing pensions in payment differently from other retirement income.

The National Association of Pension Funds also argues that the pensions industry has already been hit by the abolition of tax credits on dividends last July; that abolishing top-rate tax relief on contributions would act as a further disincentive to pension contributions at a time when the Government is trying hard to persuade people to invest more in private pensions; and less plausibly that it would discriminate between employees in contributory and non-contributory pension schemes and could lead to former employees being chased for back tax.

But the previous government established a precedent by abolishing tax relief at higher rates on mortgage interest. "Skinner" Brown, the hard man of Downing Street, could well argue that relatively few pensioners actually pay the top rate of income tax, and that anyway he could safely remove the extra incentives for top-rate taxpayers on the grounds they can still afford to put the necessary money into their pension plans. The extra tax revenue, moreover, would allow him to subsidise his plans for stakeholders' and citizens' pensions aimed at those who don't have private pension plans at present.

While pension providers and managers will continue to fight for the retention of tax relief at the higher rate right up to Budget Day and beyond, prudent top-rate taxpayers with pension schemes should be checking whether they have yet reached the maximum which can be invested in their pension scheme each financial year and if they can afford to top up now while top-rate relief is still available. The limit is 15 per cent of pay for employees in company schemes and up to 40 per cent for older workers in personal pension plans.

For employees in a company scheme the deadline may well be this month's pay-day rather than 5 April.