Pensions tax in review spotlight

The government has launched a consultation on tax relief on pension contributions to decide if there is a case for shaking up the current system.

The consultation, launched on 8 July and running until 30 September, is asking for views on whether tax relief should be reformed, to strengthen incentives to save for retirement and create a simpler system, or whether it would be best to retain the existing system.

Currently, savers receive income tax rebates at their marginal, or highest, rate – 20 per cent, 40 per cent or 45 per cent – on contributions up to the £40,000 annual allowance, the amount someone can save into a pension each year and receive tax relief.

But with Pensions Minister Ros Altmann telling the Financial Times on 28 July that a flat rate of tax relief was “one of the things we will consider”, some commentators are already suggesting that the writing could be on the wall for the enhanced tax benefits enjoyed by higher earners, like dentists.

Changes are already on the way for people building up large pensions. The pension contribution lifetime allowance – the amount that can be saved into a pension in someone’s lifetime and attract tax relief – is to fall from £1.25 million to £1 million from 6 April 2016, although there will be protection for pension pots already exceeding £1 million.

And in his 8 July Budget, Chancellor George Osborne said the annual allowance – the amount that can be saved each year into a pension and receive tax relief – would be subject to a new taper from April 2016 for the biggest earners.

Anyone with an “adjusted annual income” – including their own and any employer pension contributions – of more than £150,000 will be subject to a tax relief taper. For every £2 of adjusted income above £150,000, the annual allowance will be cut by £1, to a minimum of £10,000, i.e. once someone’s income is above £210,000, there will be no further reduction.

Ahead of the April 2016 changes, the government has split the 2015-16 tax year into two periods – running from 6 April 2015 to 8 July 2015 and from 9 July 2015 to 5 April 2016, with an £80,000 annual allowance for the first period.

If the allowance is not used during this time, it can be carried forward to the second period, subject to a £40,000 limit on contributions.

So even if someone has already paid substantial sums into their pension before the 8 July Budget – up to £40,000 – they could top up their pension pot by another £40,000 and benefit from tax relief worth around £18,000 for additional rate taxpayers.

Any unused annual allowance from the previous three years can also be added to these amounts in the normal way.

Higher earners wishing to make the most of existing tax relief arrangements need to act quickly to maximise pension contributions ahead of the April changes. As a new pension tax environment emerges from the government’s consultation, expert advice will also be essential to decide on a way forward for pension saving that also delivers tax efficiency.

The pensions specialists at Milsted Langdon Financial Services can provide expert advice on all aspects of pensions and retirement planning, to help you maximise the value of your pension contributions now, as well as in the future. For more information, please contact us.

Posted in Barristers.