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Osborne could cut pension tax relief in the March budget; high rate tax payers should act now

 

Tax incentives offered on pension contributions for high earners could be cut in George Osborne's March 2016 Budget. The Chancellor’s pension overhaul is set to make the government substantial savings, and whilst high rate tax payers are expected to be hit hard, the move to a single pension savings incentive may well benefit those on lower incomes.
 
Currently workers benefit from tax relief at the same rate as the income tax they pay, at either 20, 40 or 45 per cent. This has meant that the high earning wealthy have benefitted the most from the government when it comes to saving for retirement. The proposed new scheme aims to make a fairer system by introducing a new single pension saving incentive, with figures of between 25 and 33 per cent having been suggested as the new rate for everyone.
 
Today, to secure a pension contribution of £100 after tax relief, a basic rate taxpayer has to pay in £80, while a 40 per cent taxpayer needs to pay in only £60 (although they may only automatically receive 20 percent, with the remainder needing to be claimed via HMRC). Under the new system, if the new flat-rate tax relief was set at 33 per cent, each £100 of total pension contribution would cost everyone just £67, regardless of their tax contributions. The change would affect most company and personal pensions, both of which attract tax relief on contributions.
 
If George Osborne goes ahead with his tax reforms on the pension system then it will certainly knock higher earners confidence in saving for retirement. Whilst at the moment we can only  predict what is going to happen to pensions in the next budget, high rate tax payers may want to consider maximising their pension contributions now if they can afford to do so. Those in lower bands may wish to hold off until after 16th March as it is widely expected that they will receive a greater tax break after that date. 
 
The Chancellor could introduce the change to pensions with immediate effect. He may also announce other changes to pensions in March, for example it has been suggested that the annual maximum amount which can be paid into a pension and receive pension tax relief may be cut from £40,000 to £25,000.
 

If you want to find out more about your retirement savings, get in touch, we’d love to help. Please get in touch.
 

Date Issued: 4.2.16

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