UK high earners urged to make the most of allowances before pension tax rules change

News - Tax

Written by Ray Clancy

Friday, 15 October 2010 10:18

New UK pension tax rules have been widely welcomed but high earners are being urged by experts to make the most of their pension contribution this year.

The main change sees the introduction of a new annual allowance of £50,000 in April 2011 and a reduction of the lifetime allowance (LTA) from £1.8 million to £1.5 million in April 2012.

Overall the Treasury announcement has mixed fortunes for pension savers but the simplification of the tax rules is welcomed, particularly for higher rate taxpayers as is the decision not to introduce retrospective tax charges.

The Government will consult on what measures to put in place to protect the small group of people who have already saved above £1.5 million. They have said that people who are currently entitled to primary or enhanced protection should continue to receive these protections. Primary and enhanced protection was brought into place in April 2006 when the LTA was first introduced.

A new protection regime will be introduced so that anyone with a pension pot currently above £1.5 million has the excess protected from any tax charge, subject to a cap at the current level of £1.8 million according to Andrew Tully, Senior Pensions Policy Manager, at Standard Life.

‘The Government's commitment not to introduce retrospective tax charges is only fair as some people have made substantial pension saving in good faith. De-coupling the trivial commutation level from the lifetime allowance means that those with small pension pots will not be adversely affected. Hopefully the Government will continue to index the trivial commutation limit in future,’ he said.

Sean McCann, tax specialist at insurance, pensions and investment specialist NFU Mutual, said that it is vital that some high earners try to maximise this year’s tax efficient pension contribution immediately. ‘Someone with a yearly income between £50,000 and £130,000 should consider investing more of their savings and disposable income before the reduced annual allowance comes into force in April 2011,’ he explained.

He described the simplification of the rules as ‘good news’ for people earning over £130,000 each year. ‘Full tax relief will be available on the first £50,000 of contributions. Currently, tax relief is restricted for those with an income over £130,000,’ he explained.

Steve Latto, head of pensions at Alliance Trust Savings believes that the new proposed limit will be easy for everyone to understand and should provide an incentive for continued pension savings. ‘It is also encouraging to see that the Government has recognised that granting tax relief is as simple to operate and understand as possible so has maintained the marginal rate relief,’ he said.

He is also encouraging high earners to look to what they can do this year. ‘As the change in the Annual Allowance does not take effect until April 2011 there is a window of opportunity for those earning between £50,000 and £130,000 who plan to make a large contribution to do so, but they will need to move quickly,’ he explained.