Changes to pensions tax relief next Spring?
Earlier this year the chancellor announced a review of pension contributions and tax relief stating ‘I am open to further radical change’. It had been expected than an announcement would be made in the recent Autumn Statement, but nothing was said…
Pension savers enjoy tax relief at their highest marginal rate of tax. All savers receive basic rate tax relief (20%) at source, with ‘higher rate’ taxpayers being able to reclaim an extra 20%. ‘Additional rate’ tax payers can claim an extra 25%.
We now expect to hear news of any changes in the next budget, which is anticipated to be in March 2016. So if a change is made to the status quo, what might we see happening?
Option 1 – Abolish higher-rate and additional-rate tax relief?
The Government has already announced a restriction in tax relievable contributions that can be made by ‘high earners’ who earn over £150,000 from April 2016. Individuals earning over £210,000 will be restricted to a maximum annual tax relievable contribution of £10,000 compared to an allowance of £40,000 for those earning up to £150,000.
For many years it has been the case that the majority of tax relief is claimed by higher rate and additional rate tax payers, many of whom then claim their benefits in retirement as basic rate tax payers. This has been a topical issue for decades but so far nothing has changed.
For higher rate and additional rate tax paying clients wanting to make a lump sum contribution before the end of the tax year, it might be a good idea to consider doing this before the next budget. Better safe than sorry!
Option 2 – Introduce a ‘flat rate’ tax relief
An idea that has already received considerable support is a move to a flat rate tax relief of maybe 33%. Essentially, what would happen here is that for every £2 contributed, the Government would add a further £1. This would not only encourage lower earners to save more, but would save the government tax relief due to the disproportionate amount currently given away to contributing higher rate and additional rate tax payers.
In the absence of any changes to the rules on contributions paid by employers on behalf of their employees, the above changes would have little or no impact on employees contributing to their pension plans by way of salary sacrifice/salary exchange.
There has been many a false dawn over changes to pensions and tax relief, but with the Government still needing to reduce the national debt, scrapping higher rate/additional rate tax relief might be seen as an easy target?
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