Given recent comment from George Osborne, and mentions of the same during the Autumn Statement, it appears as though pension tax is set for a shake-up in 2016. With that in mind, there appears to be a potential opportunity for higher-rate taxpayers to make the most of their savings while the good times last.
Though not confirmed at this current time, it appears that the writing may be on the wall for up to five million pension savers enjoying the higher-rate tax relief. There is a suggestion that the generous reduction is about to be heavily curtailed – and could be scrapped altogether, with the Chancellor already indicating that major reforms to pension taxation will be announced in the March budget. The changes could see higher-rate taxpayers lose the 40% relief currently offered on pension contributions.
Instead all savers, no matter what rate of income tax they pay, may be offered tax relief at a flat rate of 33%. The Government may also create a less generous tax system for savers with valuable final salary pensions. The Government could also choose to eliminate tax relief on pension contributions, making pensions more like ISAs. This could apply to all savers, or just to those who pay higher rates of tax.
The Government spends £35bn of its £50bn annual pension tax relief bill on higher earners. This has grown substantially from £17.6bn in 2001-2002. Many feel the wealthy should not be able to reclaim large amounts of income tax while in work and pay reduced rates in old age. However, commentators believe the Government has to walk a very fine line here. Take away too much of the incentive to save and millions of people could end up woefully underprepared for retirement. The cost of supporting struggling pensioners would inevitably fall on the state – and working taxpayers.
We already know the annual allowance – the amount you can save into your pension every year and receive tax relief on – will fall for higher earners from next April. Anyone whose income exceeds £150,000 will see their annual allowance fall, via a sliding scale, from £40,000 to as little as £10,000. The lifetime allowance, the maximum value your pension is allowed to reach at any stage without suffering a tax charge, is also falling, from £1.25m to £1m in April. So higher-rate taxpayers should potentially consider pouring as much money into their pensions as they can before the days of generous tax breaks are gone for good. Ideally, higher-rate taxpayers should consider doing this before the budget next month, or at least before the tax year ends.