Budget could end higher-rate pensions tax relief

Budget could end higher-rate pensions tax relief

Danny Alexander, chief secretary to the Treasury, has told The Telegraph that he wants to cut tax relief on pensions to 20 per cent across the board, eliminating the higher rate of tax relief currently enjoyed by high earners.

The reform would help to pay for an increase in the tax allowance to £10,000.

Under current rules someone paying 40 per cent tax can claim tax relief on pension contributions at this rate.

When they retire, their pension payouts are taxed at their tax rate.

Although the change hasn’t been officially announced, pension experts are advising higher-rate taxpayers to top-up their pension fund before the Budget on 21 March in case the changes are introduced without prior warning.

Up to £50,000 can be put into a pension each tax year and the allowance from the three previous years can be carried forward if no contributions were made in those years.

The maximum annual pension contribution was cut from £255,000 a year to £50,000 in April 2011 and it may be reduced further in April 2012, which is another reason for people to act swiftly.

Nick Clegg has been pushing for some time for a tax break for lower earners, and changes at the high end of the tax scale would help to pay for this.

It costs the Treasury around £7 billion a year in higher rate tax relief.

Raising the Income Tax Personal Allowance from £7,500 to £10,000 would save £500 in tax for families whose incomes are under increasing pressure.

However today’s news that Britain’s AAA credit rating could be downgraded together with an expected increase in the unemployment figures, could put the plan to accelerate the introduction of the £10,000 personal allowance at risk.

Britain’s credit rating may be cut because of the impact of the eurozone crisis and slower than expected growth in the UK economy.

The Income Tax Personal Allowance will rise to £8,105 in April and Mr Clegg has been calling for a further increase next year.

The current deadline for the personal allowance to increase to £10,000 is 2015.

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