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Tony Harris Doing away with Labour's cap In the emergency Budget last month, George Osborne made clear that he disagreed with the cap on higher-rate tax relief on pension investment brought in by Labour. At the time, the chancellor suggested that it was unworkable. Last week Her Majesty's Treasury confirmed the coalition was against continuing to cap pensions tax relief, saying it could result in unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness. Making way for the Con-Lib cap A small note in a document released alongside the Budget said the government was considering limiting the annual allowance to between £30,000 and £45,000 a year, as an alternative to the earnings-related cap on tax relief. It is therefore not a surprise that the Treasury has announced a potential new allowance of £40,000 a year - a threshold that, reassuringly for some, is at the higher end of the scale initially envisioned. This proposal, as an alternative to a cap on pensions tax relief, is open for consultation until August 27, 2010. Written submissions are invited from representative groups, employers, pension schemes, experts and other interested parties. Contractors among the fallout An annual limit of £40,000, and a reduced lifetime allowance of £1.5 million, would allow the majority of IT contractors to continue to fully benefit from the higher rate of tax relief. However, unfortunately we do have a not insignificant number of clients who look to pensions investment as a key way to reduce their tax take by contributing substantially more. It is these clients who will now be left out in the cold by this new cap. What industry is saying Of course it is a good thing that the government is offering to consult on the subject of reducing the annual allowance. That said, we can only wait and see whether the views of the industry will have any effect on the state's final decision. For now however, most pensions advisers will probably embrace the proposed changes as they offer flexibility to the majority of investors, while retaining the 40 per cent tax rate which a Liberal Democrat-led government would have been keen to abolish altogether. Some of those advisers have pointed out the fact that the consultation with industry and stakeholders is only open for one month. This should be welcomed, as the pensions industry and investors alike need urgent clarification on what the future holds for pension tax relief. The Treasury has promised to inform us of its decision in September this year, affording investors time to prepare for the April 2011 launch date. How contractors can respond Contractors who are currently investing over £40,000 a year in a pension should consider maintaining their contributions over the coming months. Disappointingly, it is not yet clear if investors who have historically invested over £40,000 a year can continue to do so at their current rate of relief. However, as the pensions cap brought in by the previous government allowed regular investors to continue to benefit by maintaining the existing level of investment, this may be the case again. We hope the Treasury considers this as an option to allow regular pension savers to continue to benefit and we would also suggest that there should be a scale of pension relief on contributions over the £40,000 limit. An attempt to create this scaled relief may however cause confusion for investors, which was one of the major flaws in Labour's style of pension cap. Tony Harris, managing director of ContractorMoney., an independent financial adviser to IT contractors. Jul 28, 2010 Email this article Printer friendly page Previous Page
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