Big changes to the way individuals receive tax relief on pension contributions were widely predicted for the Budget on March 16th, but have now be put on hold, with a HM Treasury spokesperson stating “now is not the right time”. It’s believed that the Chancellor George Osborne backed down from making changes this year so as to not unsettle voters ahead of the EU referendum in June, opting instead for a “safe” Budget.
Looking beyond June, it’s impossible to predict what will happen, but to consider the scenario for a moment that George Osborne remains Chancellor of a Conservative Government, it would seem likely that he would push ahead with pension changes once the referendum is done and dusted, possibly in the Autumn Statement 2016 or Budget 2017, given how much the Treasury could save by reforming tax relief to help reduce the deficit.
It is, therefore, still vital to consider making full use of the available allowances over the next year or so, whilst they remain available.
To recap the potential pension changes still on the (now longer-term) horizon:
- The pensions Annual Allowance could reduce further – possibly to as low as £10,000 a year.
The pensions Annual Allowance is the limit to which pension contributions with tax relief can be made in a single year. Capping it would mainly affect high earners – and those who wish to make large one-off pension contributions.
- The pensions Lifetime Allowance could also reduce again, be reformed, or possibly even scrapped.
This is the limit to which contributions can be made in a lifetime, with tax relief. Again it is high earners most likely to be hit by a reduction in this allowance but increasingly more people have been caught by it as it has gradually reduced, particularly those with public sector defined benefit pensions. Scrapping the complex Lifetime Allowance rules would be welcomed by many – particularly if the Annual Allowance is to reduce again as this will have more bearing on the amount of tax relief can claim in a lifetime in future.
- Higher-rate and additional-rate pensions tax relief seems likely to be cut in favour of a flat rate tax relief for all.
This could potentially save the Treasury billions in tax relief, which currently disproportionately goes to high earners. It would also give a boost to lower earners’ pension savings who are arguably the ones more likely to rely on State benefits if they have made insufficient provision for retirement.
- Salary Sacrifice could be reformed or scrapped for employees’ pension contributions.
This has reportedly been in the target sights of the Treasury for some time. Salary Sacrifice means that individuals can agree with their employer to “give up” part of their salary, in exchange for pension contributions, with an immediate income tax and National Insurance saving for the individual, plus National Insurance savings for the employer. Scrapping or reforming this would bring more tax into the Treasury but could act as a disincentive to employees to save more into pensions.
- Pensions could become more like ISAs, with contributions paid from taxed income, whilst income would be tax-free on the way out.
Pensions are currently taxed on an Exempt, Exempt, Taxed (EET) basis which means they benefit from tax relief up-front and the growth on that, and are taxed on the way out (with the exception of the tax-free lump sum). The Government could seek to change this to a Taxed, Exempt, Exempt (TEE) basis, so there would be no tax relief on the way in, but any income taken would be tax-free in retirement, and pensions would be more like ISAs. Indeed, they could be rebranded as ‘Workplace ISAs’, ‘Retirement ISAs’ or the like, as ISAs have been incredibly popular whereas pensions have suffered from a poor image for some time. This would also be a stealthy way to remove the Tax Free Cash element of pensions as, although the income would all be tax-free, currently the Tax Free Cash is effectively Exempt, Exempt, Exempt (EEE) as it benefits from tax relief up-front and is tax free on the way out. This move would also save the Treasury billions.
Want advice? Speak to your Cambrian adviser or call us on 01244 539595 to arrange a free, no-obligation consultation meeting.