By Justin Rourke, head of advice, Armstrong Watson Financial Planning
Recent media reports suggest the Chancellor may introduce a new flat rate of 30% tax relief on pension contributions.
Labour has a £22bn ‘black hole’ to fill and Rachel Reeves is set to announce how the Government will tackle this in her first Budget on October 30.
Until this date any commentary is speculation not fact or advice, however, should the rumours prove true, it may leave no or very little time for those impacted to act.
What is tax relief on pensions?
When a UK resident individual makes a personal pension contribution it is ‘grossed up’ meaning that basic rate tax relief is added to the contribution by HMRC.
In practice this means that a £100 contribution is increased to £125 for all basic rate taxpayers (20% income tax payers).
If that individual is a higher rate tax payer (40% UK income tax), they can claim an additional 20% relief via self assessment or an increase to their basic rate tax band.
Who benefits from pension tax relief?
This relief is an incentive to all individuals to make pension contributions, with those who are higher rate tax payers having the greater benefit.
The complex ‘annual pension taper’ was introduced by the previous government in an attempt to reduce pension allowances for high earners.
The tapered annual allowance further limits the amount of tax relief high earners can claim on their pension savings by reducing their annual allowance to as low as £10,000 with the adjusted income threshold now at £260,000 earnings.
Speculated change and who could be impacted:
- Reports suggest a flat rate of 30% relief on contributions may be introduced
- On this assumption basic rate taxpayers would be better off as the £100 contribution would be grossed up to almost £143.
- This would reduce the tax relief available to higher-rate taxpayers currently at 40% on earnings over £50,000.
- And 45% on earnings over £125,000.
What can you do?
Pensions remain complex, this note is not personal financial advice. The amount you can pay into pension tapers if you breach both the threshold income and adjusted income limits.
Once your threshold income exceeds £200,000, your allowance reduces by £1 for every £2 your adjusted income rises above £260,000. The minimum this can taper to is £10,000.
Some individuals will not have used their allowance of £60,000 for the current tax year and should seek advice on doing so.
Some individuals will have ‘carry forward’ allowance available from the previous three tax years and should seek advice on using some or all of this.
Before using these allowances, you will need to cross check your relevant earnings for the current tax year, your available carry forward allowance and check if the annual taper impacts your allowance.
There is an opportunity for some high earners to secure the 40% or 45% tax relief before a change is made (if indeed a change is made), please speak to one of our qualified advisers if you think that you may be impacted.
What we don’t know:
- If the rumours are true at all.
- If true, when they will be implemented.
- What, if anything, will change for non-taxpayers (who can currently pay £3,600 gross per annum).
- If any changes will be made to the annual allowance.
- If any changes will be made to the annual taper allowance/threshold.
- How company/employer pension contributions will be treated.
- If any changes will be made to the carry forward allowance.
Please be mindful that once you pay into a pension you cannot withdraw from it until you age 57-plus.
Experts from our tax, financial services and accounting teams will be analysing the budget and will discuss the implications of the announcements for individuals and businesses in a live webinar at 9.30am on Thursday October 31.
