Pension tax breaks slashed for big earners

The tax breaks high earners get on pension savings are to be cut dramatically to save £4 billion a year, it was announced today.

The amount people can save tax-free into a pension each year is being slashed from £255,000 to £50,000 from next April.



But those on high salaries will continue to receive tax relief on pension savings at the highest rate at which they pay income tax.



The Government also plans to reduce the lifetime pensions savings allowance that benefits from tax relief from £1.8 million to £1.5 million from April 2012.



The reforms replace the complex changes to the regime proposed by the previous government, under which people earning more than £150,000 would have had the level of tax relief they received gradually reduced to 20%, despite the fact that they paid income tax at 50%.



The previous proposals sparked outrage from the pensions industry, with commentators warning that the rules would be complex to administer and might put people off saving through a pension.



Today's measures received a broad welcome, although there were concerns that some people on middle incomes who had defined benefit schemes might face an unexpected tax bill.



As part of the reforms, the Government is raising the rate at which increases to the pensions accrued in defined benefit schemes are valued.



This means that someone whose pension entitlement rose by more than £3,125 a year could be hit with a tax bill.



To help protect workers on low and moderate incomes, people who exceed the annual allowance because of one-off spikes in pension accrual will be allowed to offset it against their unused allowance from the previous three years.



Exemptions will also be made for people retiring early on grounds of ill-health.



The Government also plans to hold a consultation on allowing people to meet any tax charges they face out of their pensions.



It estimates the measures will affect only around 100,000 people, 80% of whom earn more than £100,000 a year.



Financial Secretary to the Treasury Mark Hoban said: "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.



"The coalition Government believes that our system is fair, will preserve incentives to save and - compared to the last government's approach - will help UK businesses to attract and retain talent."



The changes were welcomed by industry bodies and business groups.



Joanne Segars, chief executive of the National Association of Pension Funds, said: "Today's announcement is a welcome and pragmatic approach that will help to ensure that saving through a pension remains tax-incentivised.



"Increasing the annual allowance to £50,000 will help to ensure that modest earners with long periods of pensionable service are not caught with an unintended tax charge."



John Cridland, CBI deputy director-general, said: "Today's announcement is not as bad as feared. The Government had considered making the annual allowance as low as £30,000.



"It rightly heeded warnings about the impact that restrictive regimes can have on pension saving, and these new proposals are a significant improvement on the approach proposed by the previous government, which was simply unworkable."



But others pointed out potential problems with the new regime.



Marc Hommel, pensions partner at PricewaterhouseCoopers, said: "The current Government estimate is that 100,000 people will be affected but this could potentially double as many more people could be caught in future if the annual and lifetime allowances remain frozen and inflation takes off."



Others expressed concerns about the impact the changes would have on the self-employed, whose incomes are more irregular, as well as the short timeframe in which the changes would be implemented.



The announcement comes a week after the Government hit the middle-classes by announcing that it would no longer pay child benefit to higher-rate taxpayers from 2013.

Suggested Topics
News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Microsoft Dynamics AX Functional Consultant

£65000 - £75000 per annum + benefits: Progressive Recruitment: A rare opportun...

Day In a Page

Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star