Quantcast
Menu
Save, make, understand money

News

Pension tax relief shake-up scrapped: what options are left for Osborne?

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
07/03/2016

The Treasury has said tax relief on pensions will not be scrapped in the upcoming Budget despite widespread rumour. So what changes to pensions are still possible on 16 March?

A shake-up to pensions based on an ISA style scheme where tax relief is scrapped in favour of tax free withdrawals and a 20% government “top-up” will not happen, for now.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the Treasury would now find it “very difficult” to make any significant changes to pension taxation without suffering a big dent in credibility.

However, he said the Treasury still has “plenty of wriggle room for changes in the Budget”.

“Given that the need to raise money hasn’t gone away, pensions must still represent a tempting target. This does look like a stay of execution and investors should still take advantage of higher rate relief while some certainty remains.”

What options are left for the Chancellor?

McPhail outlines what the Chancellor could do:

  • Reduce the Annual Allowance
  • Reduce the Lifetime Allowance
  • Extend the Annual Allowance Taper
  • Restrict salary sacrifice

The Annual Allowance

This is currently £40,000, having been cut already from £50,000 and £255,000 in 2011.

McPhail says: “While for many, £40,000 a year looks more like an annual salary than a pension contribution, for higher earners, those who’ve left their pension funding until late in their careers and for older members of final salary pension schemes, this is already an “uncomfortably low ceiling” but it might not stop the Chancellor from bringing it lower.”

The Lifetime Allowance

The LTA has been progressively slashed, down from £1.8m in 2011 and we know it is being cut further to £1m from 6 April 2016.

McPhail says: “Many in the pensions industry have called for it to be scrapped altogether however the Treasury has found this a useful mechanism for progressively restricting the overall amount investors can build up in their pensions.”

The Annual Allowance Taper

From 6 April 2016 this will progressively restrict the Annual Allowance for those with adjusted incomes in excess of £150,000. For those over £210,000, their Annual Allowance will be just £10,000.

McPhail says: “This threshold could be moved down, bringing more people into the taper.”

Restrict salary sacrifice

Around 70% of company pensions use the practice of channelling individuals’ pension contributions through their employer to save National Insurance.

McPhail says: “The National Insurance exemption on pension contributions costs the Exchequer around £15bn a year so is a very tempting target. However it would be hugely unpopular with employers and would cause substantial administrative upheaval for payroll managers.”

What else can we, or should we expect from the Budget?

Help for the WASPI campaigners

The WASPI campaigners want the government to help out the women born in the 1950s who are affected by changes to the State Pension age. In spite of several parliamentary debates and a petition with well over 100,000 signatures, the government has resisted all demands for any policy change or compensation. Hargreaves Lansdown believes it’s unlikely the Chancellor will use the Budget to unveil some kind of bailout scheme.

Cutting income tax

George Osborne would like to cut income tax. Only a couple of weeks ago the HMRC published data showing that the April 2013 reduction in the top rate of income tax from 50% to 45% had generated an extra £8bn in tax revenue.

McPhail says: “Cutting income tax rates would play very well with the Tory heartlands. The most likely change is a shift of the thresholds. Any changes to income tax rates would automatically affect tax relief on pension contributions.”

The self-employed

McPhail says: “The self-employed are getting left behind when it comes to pension planning. Their participation in the pension system has collapsed as their numbers have increased in recent years; there are now around 4.5 million self-employed workers in the UK and only around 10% are currently contributing to a pension. It may not be the Chancellor’s top priority right now, but this group of workers clearly needs some help in getting on top of saving for retirement.”

Non-earners pension allowance

The non-earners pension allowance is £3,600 and has remained frozen since 2011. Had it been inflation linked it would be 50% higher at £5,410.

“This is a valuable way for stay-at-home parents and careers, children, students, and other non-earners, to put something away for their retirement and is long overdue an upgrade,” McPhail says.