New pension tax relief plans receive qualified support

3 September 2010

Government plans to simplify pensions tax relief have won qualified backing from the Chartered Institute of Taxation (CIOT).

The plans to change the way that pension contributions are treated for tax purposes are currently out for consultation.

The Treasury is proposing that each taxpayer's annual pension allowance, the amount by which pension funds can grow tax free, should be reduced from the current £255,000 a year to between £30,000 and £45,000.

The new measures would replace the previous administration's intention to taper pension tax relief for higher earners.

Responding to the consultation, the CIOT described the new pensions tax relief proposals as an improvement on the previous rules but identified issues that still need to be resolved to make them workable.

Colin Ben-Nathan, chair of the CIOT's employment taxes sub-committee, said: "We have always argued that the original proposals to restrict tax relief would cause disproportionate complexity and significant administrative burdens on individuals, businesses, pensions administrators and HM Revenue and Customs.

"Our view was, and remains, that lowering the annual allowance can achieve the government's policy goals whilst also maintaining certainty and fairness.

"Although a reduced annual allowance impacts on more individuals than would restricting the tax relief for individuals with incomes of £150,000 and over, we think the simplicity of a reduced annual allowance has the potential to be fairer, simpler to understand, and minimises the additional compliance burdens placed on employers and pension scheme administrators."

Nevertheless, the CIOT pointed out areas where issues are yet to be solved.

In particular, the need for a fair and practical method of valuing accruals from defined benefit pension schemes, along with the position of hybrid schemes - part-defined benefit, part-defined contribution - which is not addressed in the discussion paper.

John Whiting, the CIOT's tax policy director, was optimistic about dealing with the problems: "We all understand that pensions tax relief is to be curtailed for high earners, but there must be a better way than the complicated system pushed through before the election.

"The government's route of a simple and pragmatic cut in the annual contribution limit is in line with our own proposals. Some problems remain but these are soluble."