The Budget 2012 & The Possible Reforms to Pension Tax Relief

23 Feb

The Liberal Democrats have pledged to raise the threshold at which people start paying income tax from current levels to £10,000. To pay for this many experts are predicting the government will cut tax relief on pensions.

There are a number of ways to reduce the pensions tax relief bill, and each has potential consequences for your clients…

Current tax relief

In October 2010, the government reduced :-

  • the annual allowance on pension contributions from £255,000 to £50,000 per year
  • the lifetime allowance was also reduced from £1.8m to £1.5m.Cutting higher rate relief
  • pension savers can withdraw 25% of their fund from age 55 free of tax, when they crystallise their benefits


Proposal 1. – Remove Higher Rate Tax Relief

  • the Lib Dems are in favour of cutting tax relief on pension contributions for all to 20% (i.e. no additional tax relief for 40% & 50% tax payers) 
  • the Conservatives are not in favour of this change.

Proposal 2. – Cutting Tax Free Cash

  • the possible taxation of the pension commencement lump sum (PCLS)

Proposal 3. – Cutting the Annual Allowance

  • the Annual Allowance could be reduced from £50,000 to £40,000.


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