Just after announcing that National Insurance contributions (NICs) would be increased for the self-employed in his first (and last) Spring budget, Chancellor Phillip Hammond made a shock u-turn and scrapped that policy altogether.
How will the Chancellor generate income?
While many welcomed this news, the question of how the Government will make up for this lost revenue remains.
The Government has made many promises in terms not raising taxes in certain areas – Income Tax, NICs and VAT are all untouchable, unless they renege on these promises. However, there is one area in which they have made no promises and therefore we believe pensions could be firmly in the firing line.
Reducing annual allowances – the easy option
An easy option would be to reduce the annual allowance to £30,000 from its current level of £40,000. This will further hit those saving for retirement as they will either have to put less into their pension, or be hit with a higher tax charge. Those in defined benefit schemes may have little choice but to pay the higher charge, but those in more flexible schemes may want to look at alternative options, such as ISAs, where you will now be able to save £20,000 tax-free in the 2017/18 tax year, beginning on 6 April 2017.
Pension carry forward allowances
The Chancellor may also decide to scrap carry forward of pension allowances. In the current tax year you can carry forward up to £130,000 of unused annual allowance from the last three tax years, reducing to £120,000 from 2017/18.
An introduction of a flat rate pension tax relief?
This would help boost retirement savings for basic-rate taxpayers, while reducing the amount that higher and additional-rate taxpayers currently receive. It would also encourage lower earners to save while the higher earners are unlikely to need help from the state anyway. However, middle earners would feel the hit on this policy.
What does this mean for you?
Ultimately, pensions are always going to be an easy hit as they are so complicated and few people fully understand them. I had anticipated that pension tax relief would be attacked in the Chancellor’s Autumn Budget even before the National Insurance backtrack, so I now think the attack could be even harder. It is therefore more important than ever to ensure you have made full use of all your allowances this tax year and consider speaking to a financial planner if you want to ensure you are protected against any changes that may be coming.
This article was previously published on Tilney prior to the launch of Evelyn Partners.