The government's plans to scrap higher rate pensions tax relief could be restricted to those earning £150,000 a year or more, according to tax experts.

Rich may bear brunt of pensions tax relief cull

The government's plans to scrap higher rate pensions tax relief could be restricted to those earning £150,000 a year or more, according to tax experts.

Pension tax relief could be restricted to 20% for those earning income of £150,000 or over, rather than penalising all higher rate taxpayers, according to tax experts.

Last week, chief secretary to the Treasury Danny Alexander (pictured) said next month’s Budget could include a scrapping of the 40% pension tax relief given to higher rate taxpayers in an effort to save the government money.

Personal allowances given to taxpayers, including tax reliefs and tax credits, are the biggest expenses to the UK government, costing £28.8 billion per year - higher rate pension tax relief costs the government £7 billion each year.

Alexander told The Daily Telegraph: ‘If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate.’

Richard Mannion, national tax director at Smith & Williamson, said the government would have to be ‘very brave’ to scrap the relief for all higher rate taxpayers and predicted it could water down its plans to target those in the highest rate income bracket of 50% i.e. people earning income of £150,000 or over.

‘If the government was to do something it could restrict relief to 20% [for those paying 50% income tax] –that way they have not lost all the relief,’ he said.

‘The introduction of the 50% tax bracket has really bought attention [to the amount of tax relief being given].’

He noted there would be difficulty in policing tax relief on employer contributions to pensions, which automatically get full tax relief, which the government would then have to claim back from the individual.

‘With schemes paid into by the employer, the 50% tax relief is given so you would need to get the 30% back [from the individual] which could get messy,’ said Mannion.

Mannion warned that too much stripping back of pension benefits would make people reluctant to save and cost the government more in pension tax credits when people retire.

‘We have already seen a lot of reform of pensions – the lifetime allowance and annual allowance were reduced last year. It is already a far less liberal regime,’ he said.

‘Pension tax relief is expensive but if you get rid of it then people will stop saving. If you have this constant change then it will affect the amount of money going into pensions, which affects the amount in the market and affects the economy at a time when we’re trying to boost business.’