Government is currently considering cuts in higher rate tax relief on contributions to pension plans, in the emergency budget on 22nd June 2010.
The LibDems in particular are adamant that higher tax relief on contributions to the higher earner’s pension plan should be cut in the 22nd June budget. If the budget measures included totally abolishing the higher rate of 40% tax relief, the government stands to save at least £5.5bn in the next tax year. This is vastly more than the £3bn that HMRC is likely to collect from planned increases in Capital Gains Tax (CGT). Given that the new pensions minister is LibDem Steve Webb, only reinforces the likelihood of deep cuts affecting pension plans.
Whose pension plan will be affected?
The current threshold for the 40% tax rate is earnings above £37,400, which means that, taking the personal allowance into account, anyone earning over £43,000 is paying tax at the 40% rate, which they could reclaim in tax relief on contributions to their pension plans.
This means that contributions to pension plans, private pensions and SIPPs pensions should, where possible, be made before 22nd June, as that tax relief may be cut on or after that date.
Boost your pension plan to save personal allowance
Higher earners on salaries of over £100,000 have a second reason to make an urgent pre-budget contribution to their pension plans, private pensions or SIPPs pensions.
Currently, if your salary is over £100,000 you gradually lose your personal allowance of £6,475. This tapers away, so that you lose £1 of your personal allowance for every £2 you earn over the £100,000 mark. In effect, your whole personal allowance is gone once your wage approaches £113,000.
However, this can be avoided with a little clever pension planning. High earners can avoid losing their personal allowance by making contributions to their pension plans, private pensions or SIPPs pensions that lower their income to the £100,000 level.
Again – given the likelihood of a government assault on the 40% higher rate tax relief on contributions to pension plans, it would be prudent to act quickly, and make any contributions before 22nd June!
