STEPHEN DUFFETY, managing partner at Baker Tilly’s East Anglia office, warns of major change to pension scheme contributions

The Government wishes to introduce its changes by April 6, 2011, and seems to have sacrificed its announced aim of holding proper consultation over tax reforms.

The Treasury intends to reduce the annual allowance from �255,000 to between �30,000 and �45,000, and the lifetime allowance from �1,800,000 to nearer �1,500,000. No mention is made of any income threshold above which all pension relief would be withdrawn.

This will leave an element of pension tax relief available to all taxpayers, including those paying 50%, although one possibility being considered is to impose a maximum tax relief of 40%.

For anyone whose income fluctuates, in particular the self-employed and employees whose income relies on variable bonuses and who make their own pension arrangements, the drastic reduction in the annual allowance will be a major headache. There will be no provision at all for unused relief to be carried forward or for earlier years’ missed contributions to be made up.

It seems clear from the consultation document that the Government wants to restrict tax-favoured pension provision to a maximum in the range between �60,000 and �75,000 per year. There will not be an overall income limit as such; instead there will be a self-assessed charge on excessive annual contributions which has the potential to eliminate all tax relief for the year. There will also be penal taxation of withdrawals from funds that exceed the lifetime allowance.

These proposals signal an intention to impose strict limits on the extent to which pensions may be used as a form of tax-favoured saving.

Furthermore, the proposal to reduce the allowances that have been in force since “A Day”, April 6, 2006, risks introducing retrospective taxation. The reduced limits would make funds that are within the current limits liable to penal taxation solely by virtue of the reduction of the limits. This would penalise pension contributors who have made payments into their pension schemes within the current permitted limits.

The proposals also fail to make sufficient allowance for adjustments to pensions that may be forced by circumstances beyond the control of the contributor such as death, serious ill health, redundancy and divorce.

Finally, aligning the pension input period with the tax year risks adding to the administrative burden on schemes, resulting in extra cost and reducing the value of funds available to provide members’ pensions.

Whether the proposed changes will be implemented in part, in entirety, or at all, remains to be seen. However, it is always prudent to plan ahead.