Pension Tax Relief Cut To Come Into Effect – Act before 16 March10th February 2016
It is quite likely that significant changes cutting (or even entirely abolishing) the pension tax relief will be announced in the annual Budget Statement on 16 March, possibly with immediate effect. If you have pension contributions to make, you may want to act before mid-March rather than wait until the tax year end, especially if you are a higher rate taxpayer.
Budget Statement, Autumn Statement and Summer Budget
The Chancellor of the Exchequer delivers the Budget Statement every year in March or April (16 March this year). He speaks in the House of Commons, reviews the state of the economy, recent trends, as well as challenges and possible future developments, and particularly their effects on public finances. The Chancellor also presents the Government’s intentions and proposals regarding taxes and related regulations (such as changes to pensions legislation), which the House of Commons then debates. The final outcome is the annual Finance Bill.
The Budget Statement is not to be confused with the Autumn Statement, which is delivered in November or December each year and covers similar issues, although usually it is slightly less intense in terms of depth and extent of the announced changes.
In election years there is usually another update to the policies just after the election, delivered by the new Chancellor and reflecting the position of the new Government. Last year the Summer Budget speech took place on 8 July and that was when some crucial hints regarding the pension tax relief were given.
What the Chancellor Said in July
The following are some of the statements which have given reasons for concern:
“… While we’ve taken important steps with our new single tier pension and generous new ISA, I am open to further radical change.
Pensions could be taxed like ISAs.
You pay in from taxed income – and it’s tax free when you take it out. And in-between it receives a top-up from the government.”
Note particularly the “radical change”, followed by the idea of taxing pensions like ISAs. This could possibly mean a complete end of pension tax relief – it would be after tax money going into your pension and tax-free money going out when you retire.
You can find full text of the Summer Budget speech here. The part discussing pensions is approximately in the middle.
The Big Picture
Reducing the public deficit is one of the Government’s top priorities. Besides cutting spending, the Chancellor is trying to find ways to increase tax revenue. Pensions have obviously been an attractive target.
In 2013-14 the pension tax relief cost the Treasury £34.3 billion, which was approximately one third of the public deficit for that year. Out of the £34.3 billion, about 75% could be attributed to higher and additional rate taxpayers. It is argued that the existing pension tax relief system spends substantial amounts of public money on supporting those who need it least.
While the intention to “tax pensions like ISAs” is still a rough idea (until mid March at least) and the eventual outcome may be less radical than that (such as a flat rate or a reduction of the tax relief for higher and additional rate taxpayers only), it is quite clear that the pension tax relief is one of the Chancellor’s primary targets at the moment. We already know that the annual allowance for those earning above £150,000 will fall to as little as £10,000 (£40,000 less £1 for every £2 of income from £150,000 up to £210,000), effective from 6 April. It is highly likely that further changes will be announced soon.
Act before the Budget Statement to Avoid Bad Surprises
Originally some announcement regarding possible pension tax relief changes had been expected in the Autumn Statement. It didn’t come and is now widely expected to appear in the 16 March Budget Statement. No one (other than the Government) knows if the changes will actually come now and how they will look, but the risk is very high.
It is recommended to review your pension and make contributions before the Budget Statement, especially if you are a higher or additional rate taxpayer. Talk to your adviser if you are not sure how much you can contribute (if you haven’t used your full allowance in the last three tax years, you might still be able to get that money in).Share: