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Pensions tax relief sacrificed for IHT cut

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8th Jul 2015
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Continuing this Budget’s give and take trend, the cuts to inheritance tax will come at the cost of a reduction in the tax-free limit on pension contributions from £40,000 a year to £10,000 for high earners.

The changes to pensions tax relief will decrease the amount higher earners can pay annually into their pension and still qualify for tax relief from £40,000, tapering this to £10,000 for those making £150,000 a year or more. The government anticipates that only 1% of taxpayers exceeds this threshold and saves into pensions.

“To ensure this measure is focused on the higher and additional rate taxpayers, who currently gain the most benefit from pensions tax relief, those with income, excluding pension contributions, below a £110,000 threshold will not be subject to a tapered annual allowance,” read the Budget.

For those individuals affected however, it could come at a cost of hundreds of thousands of pounds over a lifetime. For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.

Rebecca Benneyworth, tax lecturer and practitioner, reacted to the change with surprise, saying, “It will involve huge complexity for everyone in defined benefit schemes - and if the contributions made by employers are not to be treated as taxable income then we'll have massive diversion of earnings into employer pension contributions.”

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Francois
By Francois Badenhorst
09th Jul 2015 11:09

Hot off the presses from the CIOT

Speaking about the cut to pensions tax relief, Patrick Stevens, CIOT Tax Policy Director, said:

“In his speech the Chancellor suggested a new pensions arrangement that would see non-tax relieved contributions being made in return for an ISA like wrapper and tax-free withdrawals. Exactly how this would work alongside existing arrangements which see contributions up to permitted limits being tax relieved is unclear. Whatever the future holds we hope that the result of the consultation is a simple to understand and operate pensions tax regime that does not prejudice existing pensions.

“The current complexity that a new stable regime should aim to remove is illustrated by today’s announcements that the lifetime allowance will be reduced further, which introduces a need for additional protection regimes for schemes worth over £1m (on top of the various protection regimes introduced each previous time the limit was reduced), and that the annual allowance will be tapered from £40,000 to £10,000 for savers with incomes over £150,000. The latter also requires transitional measures which will see pension input periods aligned with the tax year and a split pension input period for contributions made this year before and after the Budget, potentially meaning that up to £80,000 may be contributed in 2014-16 without incurring an annual allowance charge!”

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