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Technical View

Technical View

Welcome to this month’s Technical View, where we look at pension tax relief and how the new Conservative government could affect this.

Technical View aims to answer queries received by you, as a financial adviser for your use when you meet clients in similar scenarios. We hope that this provides useful, topical and valuable information.

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In the Conservative Manifesto, they stated their intention to target pension tax relief for people who earn in excess of £150,000. Now they have taken office and announced a new budget, to be held on 8 July 2015, there is some speculation as to what could be announced following on from their election pledges, George Osborne is keen to turn these into reality.

 

How it currently works


Ordinarily everyone in the UK under the age of 75 is entitled to tax relief of a minimum of 20% on their pension contributions, even non-taxpayers (up to a maximum of £3,600 gross per annum). Depending on the rate of tax that the client pays, they could claim a further 20% or 25% via self-assessment for their pension contributions. However, they must be a relevant UK individual.


What is being proposed?


One of the Conservatives election pledges was to cut the tax relief on pension contributions for those people earning in excess of £150,000 per annum. In broad terms, it is intended to taper the pension savings annual allowance from £40,000 pa (earnings at £150,000) to £10,000 pa (earnings at or more than £210,000). What this means for a client is for every £2 they earn over £150,000 their pension annual allowance will reduce by £1.

Note that this allowance applies to pension savings from all sources. 

Clients may still be able to contribute in excess of their annual allowance. However, any pension savings made over and above the available allowance will not receive tax relief and some pension administrators will not accept non relievable pension contributions into their pension plans.

It is important to remember that even where pension contributions are paid by the employer for any savings made in excess of the available allowance the individual will be subject to tax at their highest rate of tax. This needs to be declared on the self-assessment tax return.

There is no certainty that George Osborne will announce anything in his new Budget in July but for those high earners, wanting to utilise the £40,000 annual allowance, they may wish to make pension savings sooner rather than later, just in case this pledge comes into effect immediately after the Budget.

 

Example


A client earning £210,000 per annum wants to make a total pension contribution of £40,000 in their current pension input period.
 

 

Acting Now

If Tax Relief Is Cut

cost

 

Tax relief

Effective cost to client

Tax relief

Effective cost to client

 

45% tax payer

£18,000

£22,000

£4,500

£35,500

£13,500


For those clients who may not have maximised their pension savings in the previous three years (and where personal contributions are made have relevant UK earnings to support such contributions), it may be possible to carry forward any unused annual allowance and make pension savings in excess of £40,000.      

Comment


Whilst this was pledged in the Conservative Manifesto it may not happen; especially when you consider the new pension minister, Ros Altman is very much in favour of simplifying pension savings. This proposal is far from being simple.

Nonetheless, as mentioned earlier, for those affected and if it is feasible it may be worth considering bringing forward any plans to make pension savings before the Summer Budget on 8 July 2015.

Hopefully this edition has given you some thought and a potential call to action with the high earning clients you look after. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date Issued: June 2015

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at June 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH.

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