Pension contribution cap to be reduced

The Treasury have confirmed that it plans to reduce the annual limit on the amount of pension contribution people can receive tax relief on from £255,000 to £50,000.

It has also confirmed that it will reduce the lifetime allowance on money that can be saved in a pension fund for which tax relief is allowed. This will come down from £1.8 million to £1.5 million.

Higher earners will, however, retain the benefits of tax relief at 40 per cent and 50 per cent.

The labour government had proposed that those earning £150,000 or more should have a taper applied reducing the tax relief to 20 per cent. These plans have now been dropped.

The government hopes that the change will in time save as much as £4 billion. It has also estimated that the change to the annual allowance will affect some 50,000 savers of whom 80 per cent will be earning over £100,000.

The new annual allowance will come into effect as from April 2011; the new lifetime allowance from April 2012.

Mark Hoban, the Financial Secretary to the Treasury, commented: "We have abandoned the previous government's complex proposals and developed a solution that will help to tackle the deficit but not hit those on low and moderate incomes. We have taken a tough but fair decision.

"The coalition government believes that our system is fair, will preserve incentives to save and - compared to the last government's approach - will help UK businesses to attract and retain talent."