Pensions tax relief: Will simple work?

Perhaps one day it will come to be seen as the last gasp of the UK’s outmoded and overly complex approach to tax law, but coinesseurs will be keeping their eyes open for clauses in the Finance Bill 2011 repealing provisions in the Finance Act 2010 (April) to restrict tax relief on pensions, before they actually come into effect.

AccountingWEB.co.uk Tax Editor Rebecca Benneyworth was one of many commentators to complain about the technical flaws in this this ill-fated legislation that included a tapering reduction in relief that meant those earning between £100,000-£113,000 would have experienced a marginal tax rate of 60% as their personal allowances were reduced by 50p for every extra pound they earned.

“It had some major technical flaws associated with it,” said Benneyworth. “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.”

After promptings from the likes of Benneyworth, CIOT tax policy director John Whiting (now director of the Office of Tax Simplification) and Grant Thornton's head of tax Francesca Lagerberg, the new government has embraced the simple idea of restricting the annual limit for pensions relief from £255,000 to somewhere around £35,000-£40,000.

“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,” said Benneyworth.

But a 27-page HMRC/Treasury consultation document (353kb PDF) published this week indicates that in the world of tax, nothing is quite that simple.

Also see AccountingWEB.co.uk's summary of the seven other consultations issued this week, ranging from furnished holiday letting rules to PAYE reforms and UK/foreign owned company rules.