Concerns have been raised over changes to pension tax relief from next year. Under government proposals, high earners will face increased restrictions on this type of relief from 6 April 2011.

Contractor accountants frequently cite pensions as extremely tax efficient, so any changes will be a huge blow.

The first warning of the changes were signalled in the joint Treasury and HM Revenue & Customs document entitled ‘Implementing the restriction of tax relief’. This was released in December 2009 and the consultation period ended in March this year. At the budget it was confirmed that proposals would enter legislation as proposed.

Under the new rules, anyone with income between £150,000 and £180,000 will see the tax relief on their pension contributions tapered from 50% to 20%. If an employer makes contributions these will also be affected, as a special tax recovery charge will be made and will be imposed on the individual.

Professional bodies that have raised concerns over the plans include the Chartered Institute of Taxation (CIOT). They are concerned that the proposals are disproportionate and will cause a huge administrative burden to employers, accountants and the pension industry as a whole. The CIOT have pointed out that even government estimates have stated that the cost of compliance to businesses will be around £1 billion in the first year of the new rules alone.

With the plans being described as unworkable in practice, an alternative solution put forward is to limit the total amount that can saved into a pension each year by high earners.

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