Lib Dems' pension tax: '5p on rate of income tax' for senior public sector staff This £16,000 theoretical contribution would be taxed at 20pc if higher-rate relief were abolished, resulting in a tax bill of £3,200 a year. But members of this pension scheme are also entitled to a lump sum, which gives rise to another tax liability. The lump sum increases at the rate of three eightieths of salary each year, or £3,000 for a worker on £80,000. This would attract tax at 20pc or £600, leading to a total bill of £3,800 - the equivalent of 4.75p on the rate of income tax. The calculation assumes that salaries rise in line with inflation. If the tax were charged on teachers' actual pension contributions, currently 6.4pc of salary, the bill under Mr Alexander's proposals would be just £1,024. NHS workers, civil servants and other public sector employees would face similar taxes, although the exact amounts would vary because of differences in the structure of the schemes. High earners in the private sector would also be hit by the abolition of higher-rate relief, although final salary schemes here are dying out. Members of the less generous alternative, the defined contribution type of pension, have more scope to avoid the new tax as they can choose how much to pay in to their pensions. But any move to cut tax relief could encourage more private sector schemes to close. Ros Altmann of Saga said: "Making pensions less attractive to high earners would hit the very people who decide whether to keep these schemes going. If they lose out personally, they have less incentive to try to keep their scheme going. Bill Dodwell of Deloitte, the accountancy firm, said: "Removing higher-rate tax relief from pension contributions has some potentially unintended side effects. Individuals who are covered by defined benefit schemes - many people in the public sector - could find that while their pension fund continues to grow unaffected, they must finance the loss of higher-rate relief from personal income. Individuals in money purchase, or defined contribution, schemes have more flexibility to choose a balance between personal income and pension saving. Alex Henderson of PricewaterhouseCoopers, another firm of accountants, said: "Saying you will abolish higher-rate tax relief sounds simple but when you get into the detail there are some unexpected consequences. It will be quite a surprise to many people to see their pensions treated as a benefit in kind and taxed accordingly - just like a company car. There are some quite complicated rules around final salary pensions and the way benefits accrue. At the moment only those in high salaries are likely to be affected, thanks to the annual allowance, but if higher-rate relief is abolished then hundreds of thousands of people - head teachers, senior civil servants and police officers, hospital administrators - could be affected. The Government has other options if it wants to cut the amount of money lost to the public purse through tax relief on pensions. It is thought that, instead of abolishing 40pc relief, the Chancellor may restrict how much savers can put in a pension each year. Currently people can save up to £50,000 tax-free into a pension, but it is understood the Government is considering reducing this annual allowance to £40,000 or £30,000 instead. This could also result in a tax bill for highly paid workers in the public sector. Employees who receive a pay rise could be subject to much bigger tax bills, because the jump in their eventual pension - based on final salary - is that much higher. Workers can in some cases avoid these extra tax bills by asking the pension scheme to pay the tax and reduce their benefits to compensate. But Mr Dodwell said: "This is administratively burdensome and complex to calculate, so the rules provide that the fund must only offer the option to bear the cost where the tax charge exceeds £2,000 and also where the charges arises in relation to growth in that fund. In other words, those with multiple fund membership are likely to have to bear their own tax for at least part of their pension. Deborah Cooper of Mercer, the actuary, said: "Removing tax relief at the higher rate is complex to administer - for example, what do employers do about income outside of employment? - and a long consultation process took place only a couple of years ago that decided that the current regime would be acceptable. Going through the process of devising a new regime would not be supportive of the Government's drive to reduce red tape and the cost of regulation, or to support employers who are making good pension provision. It is thought that the Conservatives oppose the Liberal Democrats' plans. A spokesman for the Treasury said: "Taxation matters are decided at the Budget." Public sector pensions already face major reform. The Government wants to raise the retirement age, make workers contribute more and base pensions on career average salaries rather than final salary. Scrapping higher-rate relief could be seen as a backdoor method of forcing some public sector workers to pay more for their pensions.