Chancellor Alistair Darling dealt a major blow to high-earning pension investors today, as he reduced their tax relief from 40 per cent to 20 per cent.

The new rules, which will come into effect from April 2011, will only affect those earning more than £150,000. The Chancellor said pension tax relief will be “gradually tapered” to the same 20 per cent rate the majority of people receive. It will be a double whammy for high earners after their rate of income tax increases to 50 per cent from next April.

There were fears that the Chancellor would abolish higher rate tax relief entirely, but anyone who earns less than £150,000 will not be affected by the changes.

Laith Khalaf, Pensions Analyst at Hargreaves Lansdown, said: “Apart from very high earners higher rate taxpayers will be breathing a collective sigh of relief.”

Budget 2009: A step-by-step guide

Alistair Darling has revealed the steps he believes will drag Britain out of the worst economic slump since 1946

• Jobless hits 2.1m as public debt soars to £90bn

• Budget reaction: chorus of disappointment

• Alistair Darling's Budget tax hike for the rich sets election battle line

BACKGROUND

• Home sales fears despite stamp duty extension

• Power boost to wind and oil

• Wealthy pension investors hit

• David Cameron bites back at 'fictional' Budget

• Budget 2009: speech in full

Related Links

• Budget 2009: A step-by-step guide

• Treasury offers top up for credit insurance

• Budget Briefing 2009: The possible answers

Multimedia

• How did you rate this year's Budget?

The move to penalise high earners was heavily criticised by pension providers, who said it provided a disincentive to save for retirement just as the value of pensions has plummeted.

Rachel Vahey of Aegon, the insurer, said: “Pensions are for the long term so consistency is essential to give people confidence to plan for the future. We cannot afford a vicious circle of less engagement with pensions leading to increased temptation for politicians to cut their value.

“Pensions are still a good deal but the more the Government alters the rules the less trust people will have in pension saving.”

Meanwhile, there was good news for grandparents of working age who look after their grandchildren – like parents who stay at home, they will be credited with National Insurance Contribution years, which goes towards their entitlement for the basic state pension.

Those who are already retired and on low incomes also received a boost after the eligibility criteria for Pension Credit – the Government benefit to top-up pensioner’s income to £130 per week – was widened. Currently, pensioners with more than £6,000 in savings do not qualify, but from November this threshold is being increased to £10,000. The Chancellor said he expects this to allow an extra 500,000 pensioners to gain an additional £4 per week.

The Chancellor also reassured pensioners that the basic state pension will be increased by at least 2.5 per cent next year, despite RPI falling into negative territory this week.

And he added that, despite falling energy prices, he would maintain the increase in winter fuel allowance for the next year. This benefit, paid to all pensioners to cover heating costs, is worth £250 to those at least 60 and £400 to the over 80s.

For the millions of pensioners hit by falling savings rates, he announced that the annual limit for tax-free Isas will rise to £10,200 for over-50s this year and for everyone else next year. Of this, £5,100 can be saved in cash.

Michelle Mitchell of Age Concern, the charity, said: “Maintaining the winter fuel payment, measures to help grandparents and help for low-income savers will provide cheer to pensioners in an otherwise gloomy Budget. But the failure to do more to tackle fuel poverty – where one tenth or more of income goes on energy bills – will continue to leave many pensioners out in the cold.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive