As we approach the Autumn Statement in November, once again the future of pension tax relief has been called into question by both industry experts and government bodies. While no action was taken in the last few years, we believe that in 2018 it is more likely than ever that there will finally be changes to the current generous rules. In this article we explain why.
An easy target for additional NHS funding
On 17 June Theresa May announced that the NHS would receive an additional £20 billion of annual funding by 2023. This was followed several days later by an announcement from Chancellor Philip Hammond that these costs must be funded by UK taxpayers.
Of course the money has to come from somewhere. Many people believe that a reduction to the rising cost of pension tax relief for higher earners is a more likely scenario than a general increase of Income Tax.
A rising cost
For several years the annual cost of pension tax relief has been increasing. A decade ago the Government paid out £30 billion, but the latest estimate for 2018 stands at £41 billion.
What’s more, if no changes are made we can only expect this cost to continue rising. This is mainly due to pension auto enrolment. More specifically, the upcoming increases to minimum pension contributions and the extension of the programme to 18 year olds.
Calls for change
In July, the Treasury Select Committee published a report claiming that “pension tax relief is not an effective or well-targeted way of incentivising saving into pensions.” The cross-party group of MPs suggested that the Government should consider a fundamental reform of the system. They recommended doing so by either reducing the £40,000 annual allowance or switching to a flat rate of tax relief on pension contributions.
A new flat rate?
As the Chancellor has said that any tax increases should be fair and balanced, many believe that the next step will be a change to a new, flat rate of tax relief on pension contributions – most likely around 30%. After all, this would mainly affect the top 10% of taxpayers at a time when they receive an estimated 50% of all pension tax relief – while only 10% is paid to the bottom 50% of taxpayers.
Many people believe that the next step will be a change to a new, flat rate of tax relief on pension contributions – most likely around 30%.
This is different from the current system, which pays tax relief in line with the amount of Income Tax that you pay. For example, a higher-rate taxpayer would receive 40% tax relief – so their £100 pension contribution would cost them just £60. Similarly, an additional-rate taxpayer will receive 45% tax relief and their £100 contribution would cost just £55.
What to do if you are concerned
If you are concerned about the Government changing pension tax relief, you should consider making the most of the current generous rules – especially if you are a higher earner who could be worse off under a new flat rate.
If you have enough earnings, you may also be able to make extra pension contributions through carry forward. This involves carrying over any unused annual allowance from the last three tax years after you’ve used this year’s allowance.
Speak to a pension expert
For more information about using your annual allowance or if you have questions about your pensions and retirement planning, speak to our pension experts. They can help you with:
- Calculating your remaining annual allowance and the amount of tax relief you will receive
- Finding out how much you can afford to pay into your pension
- What your retirement could look like and when you could retire
- Checking your pensions against the lifetime allowance
- Using your pension to pass on an inheritance, and saving for retirement in other accounts
We hope you have found this update helpful. For more information on our latest investment views please contact Alison Fitzsimons by calling 0333 014 5429 or sending an email to Alison.Fitzsimons@Tilney.co.uk.
This article was previously published on Tilney prior to the launch of Evelyn Partners.