Lib Dem proposal to slash the tax relief on pensions could hit contractors hard
Posted Feb 13, 2012
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.
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.
- Professional Indemnity Insurance - Essential cover from Hiscox
- Helix Management Ltd - Up to 90% retention. Same day payments
- Parasol - the UK's favourite umbrella company
- Qdos - IR35 experts - Providers of low cost contractor insurance
- Contractor Finance - up to £30,000, when you need it
- Umbrella Company - 12,000 contractors can't be wrong!
- SJD Accountancy - UK's largest Accountants to Contractors
- Together we're stronger! - Join PCG, representing contractors
- ClearSky Accounting - specialist support for contractors
- Free IR35 & Tax Review - Call ICS on 0800 195 3750
- InTouch Contractor Accounting - Clients love our personal service
- Contractor Mortgages - Based on your daily rate alone