Big earners face cuts in pension tax breaks

The amount people can save tax-free into pensions each year will be slashed from 255,000 to 50,000 next April.

But those on high salaries will continue to receive tax relief on pension savings at the highest rate at which they pay income tax.

The Government also plans to reduce the lifetime pensions savings allowance that benefits from tax relief from 1.8m to 1.5m from April 2012.

The reforms replace the complex changes to the regime proposed by the previous government, under which people earning more than 150,000 would have had the level of tax relief they received gradually reduced to 20 per cent, despite paying income tax at 50 per cent.

The previous proposals sparked outrage from the pensions industry, with commentators warning that the rules would be complex to administer and might put people off saving through a pension.

Yesterday's measures received a broad welcome, although there were concerns that some people on middle incomes who had defined benefit schemes might face an unexpected tax bill.

As part of the reforms, the Government is raising the rate at which increases to the pensions accrued in defined benefit schemes are valued.

This means that someone whose pension entitlement rose by more than 3,125 a year could be hit with a tax bill.

To help protect workers on low and moderate incomes, those who exceed the annual allowance because of one-off spikes in pension accrual will be allowed to offset these against unused allowances from the previous three years.

Exemptions will also be made for people retiring early on grounds of ill-health.

The Government also plans to hold a consultation on allowing people to meet any tax charges they face out of their pensions.

It estimates the measures will affect only about 100,000 people, 80 per cent of whom earn more than 100,000 a year.

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