Will the Chancellor cut the annual allowance?

  • By: Hannah Brenton
  • 04 Dec 2012
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Chancellor George Osborne is widely tipped to take action on pensions tax relief and cut the annual allowance to £30,000 or £40,000 in today’s Autumn Statement.

Yet the industry will still be hoping the Chancellor will increase taxes on the wealthy elsewhere instead of targeting pensions.

A move to cut the allowance has been strongly trailed in recent weeks after a report in the Financial Times first revealed the Chancellor was considering raiding higher-rate tax relief for the rich by lowering the threshold of the tax-free annual allowance from £50,000 to £40,000 or £30,000, saving the Treasury between £600m to £1.8bn a year.

Pensions tax relief was brought into discussions after the Chancellor agreed to impose more taxes on the wealthy to balance a further welfare squeeze, but rejected the Liberal Democrat-backed mansions tax.

This weekend, Osborne refused to rule out targeting pensions tax relief on the Andrew Marr Show, saying: "You will just have to wait and see, wait until Wednesday."

Yesterday, pensions minister Steve Webb gave a strong hint there would be action in the Autumn Statement, arguing the government was operating in extraordinary economic circumstances and it would be an "understandable" target.

Webb said: "Wholly focusing on the people at the bottom of the pile rather than people at the top of the pile is difficult to keep doing.

"I think it's understandable why governments would look in that space. I take your point that constant chopping and changing isn't helpful but we do live in extraordinary times."

Any changes will come as a major disappointment for the pensions industry, which has warned further changes to tax relief would increase uncertainty and stop people from saving.

The National Association of Pensions Funds chief executive Joanne Segars warned the Chancellor should not "fiddle" with the tax regime, while the Confederation of British Industry director-general John Cridland said reducing the tax free limit would "fly in the face" of the government's efforts to increase pension savings.

Elsewhere, industry commentators argued a cut to the annual allowance could hit middle-income savers who top-up their pension later in life instead of higher-rate taxpayers.

There is still reason to doubt Osborne will take action, as every year rumours about a change to higher-rate tax relief emerge before the statement - but this year the numbers being discussed are more specific.

The industry does not have long to wait now, with fingers crossed, as the Chancellor reveals at 12:30pm whether the annual allowance will be cut back, or not.

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