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Summer Budget: Govt cuts pension tax relief for higher earners

Joanna Faith
Written By:
Joanna Faith

Higher earners were dealt a blow today after the government announced it will curb pensions tax relief for people with an annual income of more than £150,000.

Chancellor George Osborne confirmed the measure during his summer Budget.

Currently, anyone earning more than £150,000 can pay £40,000 into a pension annually tax free.

However, from April 2016 the £40,000 limit will be progressively cut to a minimum of £10,000 once incomes exceed £210,000.

The new rules will affect around 300,000 individuals, according to the Institute for Fiscal Studies.

What to do

What are your options if you will be affected by the new rules?

If you fund your pension personally, then you have the straightforward choice of either reducing contributions to match their revised annual allowance or continuing to make pension payments at the current level and incur the effective marginal rate of tax on income received between £150,000 and £210,000.

However, the situation becomes more complicated if your employer funds some or part of your pension, says David Smith, financial planning director at Tilney Bestinvest.

“In the event they request their employer to cease making the payments, there is no guarantee that they will increase their salary by an equivalent amount,” he says.

“Indeed, given that employers would be subject to National Insurance contributions of 13.8% on salary, it is highly unlikely that they would opt to increase salary on a 1 for 1 basis.”

There are, of course, tax efficient alternatives to pensions.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) are types of investment that offer 30% tax relief.