Earlier this week, I wrote an article warning that restrictions on pensions tax relief were due to come into effect on 6 April 2011, but that in his forthcoming Budget speech, the Chancellor of the Exchequer may announce the Government’s intention to amend or scrap this change.
Well, the Chancellor did just that.
On the back of intense criticism of the planned changes, and lobbying from business groups and the pensions industry, the Chancellor announced that the Government will look at overhauling the previous Labour administration’s plans for restricting pensions tax relief for high earners.
The Chancellor said that the Government will launch a consultation to look at alternative ways to save money on pension contributions for high earners. One possibility is to limit the annual amount that people can save into a pension fund (the ‘annual allowance’), which is set at £255,000 for 2010/11. An HM Treasury document, published at the same time as the Budget, has suggested that a reduction in the current annual allowance from £255,000 to between £30,000-£45,000 would probably produce the same sort of saving as reducing pensions tax relief for people earning more than £150,000.
There is still, however, a lot of uncertainty. The upcoming Finance Bill will include powers to repeal the measures in the Finance Act 2010 which restrict pensions tax relief (otherwise known as the ‘high income excess relief charge’) – though this will only be done once the Government has decided what to replace it with. Consequently, there is no certainty that the repeal will definitely happen; it will depend on the outcome of the consultation and whether a suitable alternative to these measures can be identified.
So, it’s back to the drawing board for the Government.
On a slightly different, but related, note, one pension change that will definitely be happening on 6 April 2011 is the abolition of the rules that force members of a registered pension scheme to buy an annuity by the age of 75. This commitment was part of the Government’s Coalition Agreement, published in May.