Warning on inflation link for pension tax relief cut

Tax on pension contributions could affect those currently earning £100,000 a year by 2020, Towers Watson has warned.

Draft legislation, due to be fast-tracked through Parliament this week, makes no requirements for index-linking on pension tax relief limits.

Under the legislation, those earning over £130,000 will see their pension tax relief tapered down, but without any link to inflation the number of people affected is set to grow.

Towers Watson says those currently earning £100,000 will start paying tax on their pension contributions by 2020 if the law does not take account of inflation.

While the bill gives the Treasury the power to increase income thresholds, there is no guarantee they will rise in line with inflation, says Stephen Green, senior consultant at Towers Watson.

"The Treasury has kept quiet about how or whether the income levels at which saving in a pension makes you liable for a tax charge will increase over time," says Green.

"The legislation leaves open the possibility that thresholds will rise, but if this was the Government's intention we would have expected it to break its silence."

The Government expects around 300,000 people to be affected by the removal of higher rate tax relief, but Towers Watson estimates this number could double within a decade if the limits are not increased in line with inflation.