Inflation could see £50,000 limit hit up to 200,000 people

Pensions professionals have welcomed the introduction of an annual contribution limit for higher rate tax relief of £50,000, and a lifetime limit of £1.5m, frozen until 2015.

But PwC says double the government’s estimate of 100,000 people could be affected by the change if inflation takes off, because the limits are frozen for five years. Tax charges are still significant for those affected, it adds, calling for further clarity on how inflation will be taken into account to determine the amount of defined benefits pension build-up that is taxable, and on how payments will be made – via the pension scheme or direct from the individual. The Treasury has today announced it will reduce the annual allowance on pensions tax relief, from £255,000 currently to £50,000. The lifetime allowance for total tax free pensions savings has also been cut from the current £1.8m to £1.5m.

Marc Hommel, pensions partner at PwC, says: “While the new tax limits are towards the less onerous end of the ranges previously suggested, substantial numbers of people could still be affected, particularly those in final salary schemes with long-service and large salary increases.

“The tax charge could be quite substantial for those caught. For example, an executive earning £150,000 a year with 20 years’ service in a final salary pension scheme will face tax of £12,200 on a pay rise of £9,000 – a marginal rate of tax of 135 per cent on the pension increase plus 50 per cent income tax – a combined tax rate of 185 per cent on the pay rise.”

“Some affected employees may decide it is worth breaching the allowances and stomaching the extra tax to ensure no loss to their future retirement income. However, this will be unaffordable for many people. Either way, affected individuals will look to their employers for help, advice and potentially some form of alternative savings vehicle.”

Andrew Roberts, partner, Barnett Waddingham says: “Increasing the multiple for calculating the annual allowance from 10 to 16 will mean that more people will have to pay tax long before they retire. For example, a final salary member on a management wage of £70,000 would only have had to have had a series of modest salary increases before being faced with a £5,000 tax bill. There is a suggestion that the Scheme can pay this (offsetting the cost from pension entitlement), which will increase the burden for administrators.”