It is anticipated that this year’s March budget will bring about some big changes in relation to tax relief on Pensions. The lifetime allowance is falling to £1 million, high earners will see their contribution allowance severely reduced (Taper Allowance) and the valuable tax relief incentive you receive on pension contributions could be transformed.
So, we thought it would be useful to explain the current situation, what the rumoured changes might be and how these changes could impact you.
Pensions tax relief is one of the more valuable tax breaks, particularly for higher and additional rate taxpayers. It costs the government nearly £35 billion a year, the majority of which goes to higher earners. Chancellor George Osborne says we could see fundamental changes and industry experts suggest a flat rate of between 25% and 33% could be introduced.
A flat rate relief of 30% would keep cost of tax relief broadly the same, therefore this would seem unlikely. However, a 25% flat rate could see a reduction of £6.1bn, which in turn would disadvantage all groups of tax payers apart from those who are basic rate tax-payers in work and in retirement.
Taper allowance comes into play on 6th April 2016, whereby the annual allowance will reduce by £1 for every £2 of earnings over £150,000. The maximum reduction is £30,000 - reached by clients with income of at least £210,000 - resulting in an annual allowance of only £10,000.
The proposed changes will affect everyone paying into a pension. Higher-rate (and additional rate) taxpayers (£43,000+ income) are likely to be worse off, basic-rate and non-taxpayers could see a benefit. Although we won’t know for sure until the budget!
So, if you are earning more than £43,000 per year then you ought to consider taking action before the budget on March 16th to make sure you benefit from the current generous levels of tax relief. If you are a basic or non-taxpayer, then it might be prudent to delay action until after the announcement.