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Emergency Budget: Pensions - relief at last!

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22nd Jun 2010
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A new annual allowance of £30,000 - £45,000 will be introduced, while tax relief will continue to be given at the marginal rate.

Well what a pretty pickle! Finance Act 2010 includes detailed and complex measures to raise a tax charge on pension contributions for the very highly paid – wrapping in not only those with income of more than £150,000 a year, but also employees with income in excess of £130,000 who will have their employer pension contributions treated as income.

Well that was plan A in any event, and many tax specialists have spent long hours not only helping HMRC with the consultations on this rather mad piece of legislation, but also preparing guidance and material for their firms and their clients on how it will all work and how the high income excess relief charge will be calculated and reported on tax returns next year.

Many pointed out during the consultation that this ill-fated legislation had some major technical flaws associated with it – and let's not forget that it is the reason that we have had the hated "special annual allowance charge" for both the last and the current tax year.

Now all is simple – as was suggested by the industry when Darling broached this idea – why not just reduce the annual allowance and deal with it that way? Although such a move would not specifically target the relief given to higher rate and additional rate taxpayers, reducing the amount which an individual can contribute to a pension tax free across the board seems like a childishly simple and effective way of reducing the tax cost of pension contributions.

So the plan is to abolish the legislation that we have already in place (before it commences) and to introduce a new amount of annual allowance of somewhere in the region of £30,000 to £45,000. Tax relief can continue to be given at the marginal rate, but clearly this would reduce the cost to the Exchequer significantly.
 

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By mikewhit
22nd Jun 2010 18:40

Typo

"reigning in the amount" - should be "reining" (think horses, not royalty !)

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
22nd Jun 2010 18:43

Nay, and thrice neigh

Sorry, the sun has got to me!! I'll correct it now!

And for those who missed it, it now says "reducing"!

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By ianjemmett
23rd Jun 2010 09:29

Tax relief on pension contributions

My understanding is that tax relief is not given at the highest marginal rate if your highest marginal rate of Income Tax is 50%. I had lengthy discussions with the technical experts at Skandia about this recently and we concluded that someone has to use all their 40% relief before any 50% relief will be granted.

Most people will not be affected, admittedly, and if the eligible contribution limit is limited to somewhere between £30,000 & £45,000 it won't matter anyway. But if my current understanding is correct we need to stop telling people they will get relief at their highest marginal rate.

Ian

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