Pension rebates to cost Brown £30bn this year

Gordon Brown is set to lose billions of pounds in tax income this year as companies and rich individuals top up their pensions.

Total payments into retirement schemes rose from £37bn in 1996 to £69bn in 2004, the most recent year for which there are figures. This year, payments could top £80bn, leading to the Treasury losing nearly £30bn in tax revenues.

New rules that came into force last Wednesday allow people to pay their entire salary into their pension fund up to a limit of £215,000. Tax experts are predicting thousands of wealthy company directors, City traders and business people will take advantage of the change.

Joanne Livingstone, principal at Punter Southall, pensions advisers, said: "The Pensions Commission estimated that £14bn is already going into personal pensions each year. If 10,000 people want to put in the full £215,000 because they are near retirement, we might see an increase of £2bn."

Top-rate taxpayers save 40p in tax for every pound they pay into a pension fund, so this extra amount would mean a loss to the Treasury of £800m in this tax year.

That figure may well be an underestimate. Tom McPhail of financial advisers Hargreaves Lansdown said that anecdotally he was aware of a large number of clients looking to top up their pensions by as much as they could, fearing the Chancellor might change the law to remove any tax advantage.

"I hope a lot of people take up this opportunity because the Chancellor deserves to have his nose rubbed in it," he said.

One economist, who did not want to be quoted as he had not finalised his estimates, said it was not out of the question that £5bn extra could go into personal schemes this year. This would cost the Treasury £2bn in lost tax.

More critically, companies are expected to spend up to £18bn this year topping up their underfunded schemes. They are coming under pressure from the government-appointed Pensions Regulator to get rid of more than £80bn of pension fund deficits over the next 10 years.

The Association of Consulting Actuaries has predicted that between £6bn and £18bn could be paid by companies this year. Stephen Yeo of actuaries Watson Wyatt reckons the figure will be around £10bn, which would see the Treasury losing £3bn in tax income.