For every £2 of adjusted income over £150,000, the annual allowance, which is the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year, will be reduced by £1, down to a minimum of £10,000.
Osborne said the annual pension allowance changes were designed to target only higher and additional rate tax payers who currently gain the most benefit from pension tax relief.
Individuals with income, excluding pension contributions, below a £110,000 threshold will not be subject to the tapered annual allowances.
In all the government estimates around one percent of taxpayers exceed this threshold and “even fewer will actually be affected by this measure.”
Nevertheless the pensions industry was quick to express disappointment with the government’s decision.
“We’re disappointed to see a further adhoc cut to pension tax relief,” said Steven Cameron, regulatory strategy Director at Aegon.
“Constant tinkering to existing pensions creates unnecessary complications, and although the latest cuts are aimed at the highest earners, it sends out a message that while pensions are very long term investments, associated tax reliefs can be changed along the way.”
Claire Carey, partner at Sacker & Partners LLP said the annual allowance (AA) tapering would leave those earning £210,000 or more with an AA of just £10,000.
“As the plan is to taper the AA by reducing it by £1 for every additional £2 of income over the £150,000 threshold an individual earns, the introduction of this measure is unlikely to be pain-free for either schemes or individuals,” Carey said.
Carey also noted that the life time allowance (LTA) for pension savings, which was cut in the March budget to £1m, would also come into effect from 6 April 2016.
“Although transitional protection for pension savers with rights already over £1 million will be introduced alongside this latest reduction, this is a far cry from the heady heights of March 2012 when the LTA stood at £1.8 million.
Changes not trivial
Dean Mirfin, technical director of Key Retirement, which targets the over 55’s, said: “The change in the annual pension contribution limit for those with incomes over £150,000 may seem trivial but older workers who are trying to fund their pensions in the lead up to retirement, who have good levels of income, will be punished at a time when they should be encouraged to contribute as much as possible.”
Osborne said the changes to the annual allowances were needed to help pay for reforms to inheritance tax where, in a widely-expected move, he raised the tax free threshold to allow home owners the opportunity to pass up to £1m to their children tax free.
“No more inheritance tax on family homes,” Osborne said in his budget speech.
Although he tempered this decision by announcing plans to taper the IHT relief away for estates worth more than £2m.
The changes to pension tax relief build on the reforms to the pensions tax system introduced in April this year which were designed to give people over 55 greater freedom with their money and flexibility over how they hold their savings.
Osborne said over 85,000 people have taken advantage of the new flexibilities for accessing pensions that were introduced in April.
