Saving 'Not Encouraged' By Pension Tax Rule Changes

Although many of us are saving for our retirement recent news from the government is discouraging for some. The highest level of tax relief will be restricted for those earning more than £150,000 a year and it will disappear altogether for those with income over £180,000. These higher earners will only get basic rate relief on all pension contributions.

The government decision to remove these higher rates of tax relief will not encourage saving, according to a commentator. The move, which was announced by chancellor as part of his Budget speech, will come into force in the coming years. While these investors only amount to around 1.5 per cent of savers they received a quarter of all tax relief on contributions.

Those who earn over this amount and want to add to their policy at the same level as before will be "out of pocket", according to a leading assurance firm.

"The government must provide assurances that it will not further erode pension’s tax relief in future," the senior pension’s policy manager at the firm said. "It creates a worrying precedent."

He added that the move broke the "long-standing principle" that tax relief should be given to people at the highest possible rate. He commented that "clear, simple rules" are the best way forward in the long term.

What is pension tax relief?

The government encourages you to save for your retirement by giving you tax relief on pension contributions. Tax relief reduces your tax bill or increases your pension fund. If you have a contributable company pension then your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions).

If you have a personal pension plan then the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

If you would like to know more about pensions why not ask AnswerBank Business and Finance.