There has been a lot of speculation over the last month re the possible abolition of Higher Rate Tax Relief on pension contributions.

This is a subject that has been kicking around for a little while now, but the current spate of headlines appear to have been sparked by an interview with Danny Alexander, the chief secretary to the Treasury, in February.

So what is the reality, and should higher-rate tax payers be concerned?

To put this in context, we would all do well to remember that the Government is not necessarily speaking with one voice, and crucially that Mr Alexander is a Liberal Democrat.

The Lib Dems are currently way behind in the polls, and it’s therefore important for the junior coalition partners to be seen as adhering to their original manifesto promises wherever possible. One of those promises was the scrapping of Higher Rate Pensions Tax Relief.

It may also be significant that the Lib Dem voice calling for this seems to be Mr Alexander, and not the more obvious choice of Steve Webb. As a Lib Dem, not to mention a very outspoken Minister for Pensions, surely Mr Webb MP would be the one positioning this change if it were likely?

And let’s not forget that less than 2 years ago, and under the current coalition government, new rules limiting Higher Rate Tax Relief were introduced. The new rules were widely welcomed, achieving as they did both simplicity to an otherwise complicated system, whilst also stopping the truly fat cats from putting on any further financial weight.

Finally, introducing such a measure is largely alien to The Conservatives. George Osborne is understood to have been historically against such a measure.

So any change would be both a significant U-turn for the entire Government, and also potentially embarrassing for Steve Webb.

But this doesn’t mean it won’t happen.

At a time when the economy is failing to meet the hoped for gains, with the resultant impact on tax-take for the government, it is a legitimate target and worthy of consideration by Mr Osborne.

Should it happen, then it remains to be seen whether this is done in a gentle way, by tapering tax-relief over a number of years, or as an immediate measure. There is precedent here. When Alistair Darling introduced similar measures the impact was immediate.

The long and the short of it is that we won’t know until George Osborne’s budget in two weeks time.

So what to do in the meantime?

If any of your employees are higher-rate tax payers, and are likely to make significant one-off payments to a pension plan in the near future, then it would be wise to alert them to this possibility so that they can consider if it would be advantageous to make such a payment prior to the budget.

As ever, if you need assistance on this, please contact your usual Jelf consultant in the first instance.

A final thought, it may well be that this entire episode is merely clever positioning by the Government to shroud a less obvious target on the pensions front. Either way, I will let you know as soon as the dust settles.

Best regards

Steve