Will the 2018 Autumn Budget bring a pension tax relief cut?

With the prospect of a pension tax relief cut for high earners seeming more likely than ever this year, you may wish to contribute to your retirement fund now.  

It has once again been suggested that the generous pension tax relief currently enjoyed by high earners will be removed at the next Budget.

To date, this scenario is simply a possibility and nothing has been implemented. However, with £20 Billion more now needed to fund Mrs May’s NHS funding pledge, pension tax relief could well be considered low hanging fruit for Mr Hammond to pick in his November Budget.

Rising costs and disproportionate savings

Of course, the funds will need to come from somewhere and reducing the rising cost of pension tax relief for high earners would certainly appear to be a much easier sell to the electorate than a general increase in Income Tax.

It is predicted that the Government will pay out around £41 billion in pension tax relief this year, up from £30 billion a decade ago.

Most people also do not realise that the status quo of applying tax relief to pension contributions means those more able to save enjoy a disproportionate boost from the Tax Man. In fact, it is widely accepted that of the £38.6 billion pension tax relief cost the Treasury in the 2016/17 tax year, 68% benefited higher/additional rate tax payers.

So, what do we mean by higher rate tax relief?

As it currently stands, people earning above the higher rate threshold of £46,350 per annum can benefit from 40% tax relief on a portion of the money they contribute to a qualifying pension scheme. This in practice means that somebody earning £80,000 per annum could make a pension contribution of £10,000 that would only ‘cost’ them £6,000. The other £4,000 of the cost would be borne by the tax payer.

If we compare this to somebody who is a basic rate tax payer (i.e. is taxed at 20%) that same £10,000 contribution would ‘cost’ them £8,000 as they only benefit from tax relief of 20%. It can therefore be seen that under the current system it ‘costs’ someone earning £20,000 per annum significantly more to add £10,000 to their pension than someone earning an annual salary of £80,000.

Calls to level the playing field

Back in July, the Treasury Select Committee published a report maintaining that “pension tax relief is not an effective or well-targeted way of incentivising saving into pensions.”  It is rumoured that the next step will be a new, flat rate of tax relief on pension contributions.

By levelling the playing field and applying a flat rate of tax relief, for example, 25% the Treasury could save around £5 billion every year. This would mean that people earning less would receive more tax relief and the people earning above the higher rate threshold less, on any future contributions. The Chancellor could therefore announce a major shakeup in the application of pension tax relief with effect from this November when the main Budget now takes place.

What to do if you’re concerned?

Anyone currently earning above the higher rate threshold (£46,350 per annum) should consider exploiting the current generous rules prior to this year’s Budget. A one off contribution before this time could see you benefit from the current rate of tax relief, perhaps for the last time. There is also concern that there may be no grace period for contributions to made following the Budget so it’s essential to act now.

For individual advice, please contact our team of pension experts who can help you by:

• Working out how much annual allowance you have remaining and the tax relief you’re entitled to
• Calculating how much you can afford to pay into your pension pot
• Advising on when you could retire and if your savings are on track
• Checking your pensions against the Lifetime Allowance
• Utilising your pensions to pass on inheritance

For further help and advice on building a bigger pension, please call us on 01244 347583 or email us at: info@innesreid.co.uk.