Benefit from pension tax relief: while you still can.
Fears of a ‘pensions tax raid’ have been reignited as the government faces growing pressure to scrap the current valuable tax perks on pension contributions, suggesting those able to benefit from the current arrangements should make use of them while they can.
Speculation is mounting that the Chancellor Philip Hammond could target pension tax reliefs as early as the Autumn Budget, following prominent calls for reform over the summer.
In July, the influential Commons Treasury Select Committee called for tax relief on contributions to pensions to be scaled back. Its key recommendations, in a report into household finances, included introducing a lower annual allowance and a flat rate of tax relief .
The think tank the Centre for Policy Studies went even further in August, demanding that tax relief on pensions be abolished and replaced with bonuses on pension contributions . Both proposals would have the effect of reducing tax breaks for higher earners.
Lower relief, lower growth
When the government last considered an overhaul of pension tax relief in 2016 it decided that the time was not right to make such a significant change. However, we warned that this was only likely to be a stay of execution: now the savings on offer to the Treasury by cutting tax relief may be too tempting to dismiss. The government has made no secret of the fact that it is urgently looking for cost savings to finance increased spending on health and social care.
Given the political climate, it may be prudent for higher and additional rate taxpayers intending to make further pension contributions to do so ahead of the Autumn Budget, which is expected in November.
Currently, contributions to pension schemes are made out of income before tax and national insurance is deducted, up to an annual limit of £40,000. Higher earners receive tax relief at 40% or 45%, while relief is just 20% for basic rate taxpayers.
Previous proposals to switch to a single ‘flat rate’ of relief for everyone have suggested a level between 25% and 33%. Under that scenario, basic rate taxpayers would be better off but higher and additional-rate taxpayers could receive thousands of pounds less in tax relief.
A higher-rate taxpayer paying 40% tax and making gross pension contributions of £10,000 a year would receive £1,500 less in tax relief annually if the rate were to be set at 25%. If it were set at 33% they would lose £700 a year. Higher earners paying 45% tax could lose even more.
Over the longer term, the potential impact of a flat-rate of tax relief could be profound as savers would miss out on investment growth on the tax relief they no longer receive.
Making the next move
There is no certainty about what changes, if any, will be made to pensions in the Budget. However, tinkering with pensions has been one of the Treasury’s favourite pastimes in recent years. The lifetime allowance – the maximum you can accumulate in all your workplace and personal pension plans – has been reduced and now stands at £1,030,000. In addition, the annual allowance has been tapered for those with adjusted income of over £150,000. The £40,000 allowance goes down by £1 for every £2 of income above £150,000 until it reaches a lower limit of £10,000.
With the pensions landscape ever-shifting, Brewin Dolphin can help you take action now to make sure you are making the most of the existing tax allowances.