Contractors could be liable for significant tax increases, according to an announcement reportedly expected from the Treasury later today, that the Coalition will change the annual tax-free pension limit from its current level of £255,000 to £50,000.
In addition, the lifetime allowance, currently capped at £1.8m, is expected to fall to £1.5m, which, added to the reduction in tax-free contribution relief, is a measure that is anticipated to cost taxpayers £4bn per year.
An estimated 500,000 taxpayers are likely to be hit for higher tax bills as a result of the changes. Many of those people will be limited company contractors and umbrella company contractors who channel their earnings into pension schemes to provide an income for retirement. Investing in pensions has been one of very few tax reliefs available to limited company contractors, and so is likely to hit them particularly hard.
Although Chancellor George Osborne has claimed that these measures are targeting only Britain’s wealthiest, contractors earning modest incomes of £40,000 but investing heavily in future pension provision could be hit with unexpected tax bills.
The move is an astonishing U-turn from an administration that has demanded public sector workers invest more in their personal pension provision because the state may be unable to fulfil its pension obligations in the future. It also goes against long-held government thinking, introduced by Prime Minister Margaret Thatcher in the 1980s, that people should be actively encouraged to plan for their own retirements.