Contractor pension tax relief benefits slashed by Coalition
Posted Oct 15, 2010
The Government has announced that the tax-free pension savings limit is to be reduced from its current level of £255,000 to £50,000.
The lifetime allowance will also be reduced from £1.8m to £1.5m, in a move which is expected to yield £4bn for the Treasury coffers, starting from April 2011.
This will come as a blow for many contractors, many of whom have take advantage of one of the few remaining tax breaks available to higher earners in recent years.
The reduction in the annual allowance will take effect from April 2011, and the Coalition plans to introduce the reduction in the lifetime allowance from April 2012.
Higher earners should share the misery
Financial Secretary to the Treasury, Mark Hoban MP, explained the background to the announcement:
"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."
With the implementation of the 50% additional tax rate for those who enjoy income over £150,000 from this April, and the stepped abolition of the personal allowance by £1 for every £2 earned over £100,000, many IT contractors will be feeling the pinch. This latest news is particularly unwelcome given the uncertainty which exists in the contract market.
The last great tax break is no more
Commenting on the announcement, Gerry Gregoire from contractor accountants, Danbro said:
"These changes are set to hit contractors particularly hard and appear to fly in the face of this government's stated aim to encourage more people to take responsibility for their own retirement.
"While the limits are not as low as they might have been, we are disappointed that contractors, who enjoy few tax breaks as it is, are likely to have this option taken away from them."
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