Darling changes rules on pension's tax relief again!
Published on 21st December 2009
Just as we thought all was largely uneventful with the pre budget report last week, Alastair Darling announced that the Pensions Cap unveiled in the 2009 Budget is being extended to trap even more Contractors in its web.
Darling announced that the pensions tax relief cap will now be extended to cover people earning over £130,000 pa. This sting in the budgets tail could affect as many as 150,000 more Britons, among these will be many Contractors.
Higher earners will find they have to pay back the equivalent of top rate tax relief via their self assessment tax return, even where that contribution was made by an 'employer' contribution. The rate of relief tapers away to just 20% which is the same rate received by a basic-rate income taxpayer!
Darling - what were you thinking?
Whilst the Chancellor made it perfectly clear that in order to cut the current deficit he has to cut spending and recoup costs through higher tax, his decision to lower the pensions cap to £130,000 came as a shock to pension industry professionals and investors alike. This news was especially troubling with regard to the anti-forestalling rules put in place when the Budget was announced in April. These anti-forestalling rules stop Contractors from investing in a closing down sale into pensions now before the cap comes in to force in April 2011.
If you earn over £130,000 per year and you have been investing regularly into a pension on either a monthly or quarterly basis then you should be able to continue to do so thankfully and still benefit from your existing rate of tax relief on investments until April 2011. However, if you have been more lax in your approach to pension investment then you could now be in trouble if you want to maximise the scope to exploit this valuable tax break whilst it lasts because you ill only be able to have a maximum contribution of £20k pa.
If you are caught by the new £130,000 limit then it is arguably more important than ever to invest up to this new special annual allowance.
A silver lining for some Contractors
If you are in the fortunate position of narrowly missing the £130,000 earnings cap, then now is the time to maximise contributions. The most effective way of contributing is likely to be through regular investments on a monthly basis as we have already seen various concessions being made for regular contributors and this could hypothetically lead to further protection in the future.
With concerns growing over the future of state pensions due to the shrinking workforce and increasing longevity, the emphasis is on personal investment to provide for your retirement. It is therefore highly unlikely that the Government will abolish tax relief altogether and if anything, the budget provides an even stronger incentive for Contractors to make regular contributions towards their future.
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