The Government provides generous tax relief to encourage individuals to take responsibility for retirement planning and to recognise that pensions are less flexible than other forms of saving. Saving through a pension scheme represents an attractive tax planning route for many high earners in the UK. Taxpayers are able to claim higher rate tax relief on all pension contributions to a registered pension scheme up to the annual limit for relief (i.e. £245,000 for the 2009/2010 tax year) provided that the total lifetime contributions do not exceed the pensions lifetime allowance (i.e. £1.8m for the 2009/10 tax year).
In the 2009 Budget, the former Labour Government decided to reduce the cost of pensions relief by approximately £4bn per annum. In order to achieve this objective, they proposed to introduce new rules, effective from 6 April 2011 that would broadly restrict tax relief on pension savings for high earners (i.e. taxpayers earning more than £150,000 per annum). Tax relief would be tapered away for those individuals earning between £150,000 and £180,000 per annum, with those earning over £180,000 only being entitled to tax relief at the basic rate (currently 20%).
The new Government confirmed in the June 2010 Budget that it was committed to ensuring that pension tax relief remained fair and affordable, and that it would proceed with the former Labour Government's goal to reduce the cost of pensions tax relief by about £4bn per annum. However, the new Government (and many advisers) had reservations about the previous Government's approach, and felt that this approach would have unwelcome consequences for pension savings, bring significant complexity to the tax system (which had been greatly simplified, to much approbation, in 2006) and damage UK business and competitiveness.
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