A new mechanism for restricting tax relief will be introduced with effect from 6 April 2011.

The Government considers that restricting tax relief on pensions is necessary to tackle the deficit. However, it believes that the legislation introduced by the previous Government, which with effect from 6 April 2011 would have restricted tax relief to basic rate on pension savings made by or on behalf of individuals with annual incomes of at least £150,000 was complex and would lead to market distortions. Accordingly the Chancellor will repeal the legislation and instead seek to raise revenue by reducing the current annual allowance from £255,000 to an amount in the region of £30,000 to £45,000.

The annual allowance is the total annual amount of pension savings which can be made with full tax relief. Pension savings in excess of the annual allowance attract a tax charge currently at 40%. Rules will be introduced to ensure that basic rate taxpayers are not subject to the restriction and to relieve hardship caused by 'one-off' spikes in pension accrual.

There will be no changes to the anti-forestalling regime which currently applies and there is a commitment to take any steps that are necessary to tackle avoidance of that regime.

Our view
Any changes that reduce the complexity of the tax system are to be welcomed. However, the new proposals will catch more taxpayers - not just those with annual incomes of £150,000 or more. It also seems that the hardship relief will not extend to those individuals who because of their financial circumstances are unable to contribute to a pension early in their careers and who therefore make substantial contributions above the annual allowance in the years before their retirement.

For more information on these issues please contact

Victoria Goode or Sara Cohen

or your usual Lewis Silkin contact