Budget 2012: Tax reliefs capped at 25% of income for higher earners

The government is to introduce a limit of 25% of income on all uncapped income tax reliefs for those earning more than £50,000 annually, announced Chancellor George Osborne in the 2012 Budget report.

This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share.

It will not be extended to those reliefs that are already capped, because to do so would reduce the amount of support the tax system gives, for example, to pension contributions.

According to Osborne, the government will explore with philanthropists ways to ensure this measure will not impact significantly on charities that depend on large donations.

Inez Anderson, tax director at Smith and Williamson, said: “It is not going to apply to pension contributions because these are already capped. It is going to have an impact on individual employees’ tax.

“It is to ensure the richest people in the UK cannot use unlimited tax relief to reduce their tax rates down to small percentages. Individuals will be able to get relief on the higher of £50,000 or 25% of taxable income.

“That is effectively saying if an employee is earning income of more than £50,000 they will be paying tax on at least 25% of their income.”

Tom McPhail, head of pensions research at Hargreaves Lansdown, added: “An entirely sensible decision to leave pensions tax breaks alone.

“In this year of auto-enrolment more than any other, it would have been madness to discourage engagement with retirement planning.”

Read more articles on the 2012 Budget report