The weekend papers are full of speculation about the future for tax relief on pension contributions. This is not a new debate.

At the time of the last budget report, speculation surrounded the future of 50% income tax and the associated 50% tax relief available for those individuals when making pension contributions. The Government shied away from changing the 50% band, preferring to maintain as much of the status quo as possible at that time whilst austerity measures took effect elsewhere.

On the run up to the next budget announcement, the possibility of the Chancellor removing some of the tax reliefs associated with pension contributions has gathered credence. The UK needs to continue to save money. The recent warning notes from the credit agencies have confirmed this. How long can the Government avoid attacking pensions? The chances are not much longer. 

This is the irony. British people need to save. It was a lack of saving and a penchant for spending which helped bring about the current recession. Whilst our Government needs to encourage us to save, they are providing very little incentive to do so. 

Interest rates remaining so low for so long are not conducive to savers and rising

Inflation has made saving unaffordable to many.

Stock market behaviour since the downfall of Lehmans in October 2008 has dented confidence and bred mistrust amongst people who want to invest, but are fearful of market falls.

Tax relief on pension contributions is one of the few reasons why retirement saving is still attractive. Particularly since the inflexibility of pensions is a hurdle to many in this ‘here and now’ culture. Currently everyone can benefit to some extent from 20% tax relief on their pension contributions. Effectively this means that if you invest £80, the Government will top up your investment by £20, giving you an overall contribution of £100.

If you are a 40% taxpayer, you could benefit from additional tax relief. In this instance if you invest £60, the Government will top up your investment to £100.

The same concept applies for 50% taxpayers; you pay £50, the Government contributes £50 on your behalf. 

If the rumours are correct and the Government does remove higher rate tax relief, higher rate taxpayers could see their pension contributions cut by 20% or even 30%. 

Another option available to the Government and which is also highly possible is a reduction in the level of the annual allowance. Currently, it is possible to invest up to £50,000 per annum into pensions for the 2011/2012 tax year. There has been much speculation that this figure may be reduced, maybe by a fifth. Were this to happen, pension funds would be reduced because the amount investors would be able to save whilst still benefitting from attractive tax reliefs would be lower. The message on this front is that anybody who is able to contribute up to the current annual allowance figure, should consider doing so in this tax year, as there is a possibility that the scope for such large pension contributions in the new tax year may not exist. 

Nothing is set in stone yet, but if you are a higher rate taxpayer and you want to avoid being caught out by a possible change in legislation, please contact us using the link below.