What could happen to pension tax relief in the Autumn Budget?
Craig Simpson, Tax partner at Bates Weston, takes us through the current tax relief system for pension contributions and the potential changes Rachel Reeves may have in mind.
There is much speculation about tax increases in the Budget and one of the main targets is income tax relief on pension contributions.
The current system for pension tax relief
The current system provides income tax relief for payments into a pension by an individual and the rate of relief depends on the level of income tax they pay.
A simple example:
- An individual puts £800 into their personal pension.
- The pension scheme claims back £200 (20% relief) and so there is £1,000 in the pension to invest. This is the basic rate of pension relief
- The individual can then submit a tax return claiming additional relief for the higher rates of personal tax
- If they pay tax at 40% then they claim an additional £200 of tax relief. This means it has cost £600 to put £1,000 into their pension; or
- If they pay tax at 45% then they claim an additional £250 of tax relief meaning it has cost £550 to put £1,000 into their pension
The idea of the system is to encourage people to save into their pension for the future by using the tax system in a positive way.
Pension tax relief changes in the Autumn Budget?
So what might Rachel Reeves do in the Budget on 30 October?
- Introduce a flat rate of relief of 25% on all personal pension contributions giving away something for lower earners but taking from higher earners, and in the process raising billions in tax revenues. I would expect they will need to bring in measures to protect any impact of the change on non-contributory public sector final salary arrangements.
- Introduce employers national insurance at 13.8% on employer pension contributions. Employer contributions under stakeholder pension arrangements are currently a minimum of 3% of earnings. Quite a revenue raising move if it happens.
- Limit the tax free lump sum on retirement. At present 25% can be taken tax free, this could be capped to say £200,000 with the balance being subject to income tax.
The mood music from the Chancellor and the Prime Minister has not been encouraging and reform of pension tax relief would seem to be the obvious place to produce some revenue raising tax changes.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.
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