IT Contractor Mortgages and Pensions

Contractors with pensions savings could be in the spotlight as Lib Dem minister Danny Alexander suggests that higher rate tax relief on pensions should be axed.

Current pension tax relief rules

Currently, for every 60p a higher rate taxpayer saves towards a pension, the Government provides 40p in tax relief. Basic rate taxpayers can receive 20p in tax relief for every 80p they contribute.

From the start of the 2011/12 tax year, additional rate taxpayers (those who earn over £150,000 per year) may be able to claim further tax relief depending on your income and contribution levels by between an extra 1% to 30%.

The 'Annual Allowance' - the amount of tax relief you can receive each year has already been cut dramatically from £255,000 in the 2010-11 tax year to a mere £50,000 in 2011/12.

Lib Dem proposals to slash tax relief on pensions

If the Chief Secretary to the Treasury's plans go ahead, the amount of tax relief higher rate taxpayers receive will be halved from 40% to 20%, and the Government would save more than £7bn as a result. According to Alexander, the Government could save just over half this amount even if tax relief was abolished only for taxpayers earning £100,000 or more.

He told the Daily Telegraph:

"f you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate."

Valuable contractor tax break under threat

Tony Harris, MD of Contractor Financials, commented:

"Whilst the loss of higher rate relief has been doing the rounds for a few years now without any changes being made, this time there looks to be some serious political momentum behind removing this tax break. We would urge any would-be investors to make contributions ahead of the budget because pensions related changes made by HMRC in recent years have not been applied retrospectively. We could be facing something of a 'closing down sale' on this valuable tax break for contractors"

Will the Tories adopt the pension proposals?

Alongside the pension proposals, the Lib Dems also want to raise the income tax threshold to £12,500 - a higher level than the current staged annual increases already agreed by the Coalition.

However, given that the 50p 'additional' income tax rate is already an extra tax on the 'rich', the Lib Dem's coalition partners will not be keen to tamper with the current tax treatment of pensions, especially as any additional taxation would affect the Tories' core voters more than any other party.

Further Information

You can find out more about how tax relief on pensions works at the HMRC site, and the Pensions Advisory Service.

For expert help with your own pension requirements, you can also get in touch Contractor Financials, our IFA partner, here.