Pension tax relief measures will add to employer costs

The government's decision to go ahead with plans to impose restrictions on pensions tax relief for higher earners will create administrative burdens for employers, it has been argued.

The Chartered Institute of Taxation (CIOT) has said that it is disappointed the government intends to press on with the changes as from April 2011.

In its submission to the government's consultation on the issue, the CIOT warned that the measures would pose a significant increase in the administrative burdens for both employers and the government.

Under the measures, which were confirmed in the Budget, income tax relief on pension contributions for people earning £150,000 to £180,000 will be tapered from 50 per cent to 20 per cent. Those on £180,000 or more will have relief restricted to 20 per cent.

The tax relief on pension contributions made by employers will also be restricted through a special charge imposed on the individual employee.

Colin Ben-Nathan, chairman of the CIOT's employment taxes sub-committee, said: "The government's proposed method of restricting tax relief will cause disproportionate complexity and an increase in the costs for employers, pensions scheme and the pensions industry as a whole."

Mr Ben-Nathan argued that even the government's own figures indicate that the compliance cost will be in the region of £1 billion in the scheme's first year alone and called on the government to consider a more straightforward approach.

He said: "If the objective is to reduce the tax relief the wealthy receive on pension contributions, we think that a simpler way to achieve this would be to restrict the maximum amount (annual allowance) you can put into registered pension schemes each year. In this respect, we have suggested a reduction from the level of £255,000, which the government intends should apply from 6 April 2011, to approximately £50,000.

"In our view the government's current proposals involve such administrative complexity as to make them virtually unworkable."