Higher and Additional Rate Pension Tax Relief to Stay for Now?

Widely anticipated plans to reform pension tax relief appear to have been dropped for the time being, with a Treasury source announcing to journalists that “there won’t be any changes to tax relief at all in the Budget”. 

The current pension tax relief system aims to effectively give back the income tax paid on any earnings that are redirected to a pension.  For pension contributions other than work pension contributions taken from salary before tax, basic rate tax relief of 20% is added at source and higher and additional rate taxpayers can claim a further 20% and 25% tax relief respectively through their tax return.  This means that a £100 pension contribution costs a basic rate taxpayer £80, a higher rate taxpayer £60 and an additional rate taxpayer £55. 

This system has been under review because higher and additional rate tax relief is expensive for the government and because it is perceived to be more generous for higher earners, who arguably can better afford pension contributions.  Apparently 70% of the £20bn cost of pension tax relief goes to the 13% of the population who are higher and additional rate taxpayers. 

It had been expected that the Chancellor would use the Budget on 16 March to announce the replacement of the current system with a flat rate of perhaps 25% for all taxpayers, or with a ‘Pension ISA’ structure, where there would be no tax relief up front but income would be tax-free in retirement instead (pension income is currently subject to income tax).  Higher and additional rate taxpayers concerned about the potential reduction in tax relief were being encouraged to make any planned pension contributions before the Budget just in case.

This weekend’s announcement means that the time pressure to act before the 16 March is now off, but it seems unlikely that the respite will be permanent.  Indications are that the issue is in the timing of the announcement, rather than the plans themselves.  Pensions have undergone several rule changes recently so for administrative reasons it would be difficult to implement another big change so soon.  There is also speculation that the government wants to limit any potential distractions from the upcoming EU referendum.

Upcoming changes that we know are due to come into effect from 6 April 2016 are the reduction in the Annual Allowance to as little as £10,000 for high earners and the reduction in the Lifetime Allowance to £1m.  For confirmation of other news we will have to wait for the Budget on 16 March 2016.

For personalised advice on your retirement planning please contact Richard Higgs on 0117 966 5699 or richard.higgs@wealthwestmedical.co.uk

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