Tax relief on pension contributions?
January 24th, 2012 in Industry News, Information, Retirement PlanningTax relief on pension contributions?
…is it under threat?
In recent years the tax relief available from pensions has been subject to a number of changes. Whilst there is no clear indication that it will be subject to more changes at the current time, I recently read an interesting article on IFA Online which looked at how certain changes could affect you and whether there were any steps you could take to reduce their impact.
Will higher rate tax relief on pension contributions be restricted?
Twenty years ago only 6.3% of all UK taxpayers paid higher rate tax, and that figure has now increased to 13.5% and continues to increase which means that higher rate tax relief on contributions is one of the most valuable features of a pension for many clients. In turn that means that higher rates of tax relief is costing the Government more money.
Just to expand on this, with higher rate tax relief, investors that pay higher rate tax can for example increase the value of their pension by £1,000 at a net cost of only £600. If this level of tax relief on pensions is removed, the same increase in pension value will cost your clients an extra £200.
The Government has set an annual allowance which currently allows savers to contribute up to £50,000 to their pension each tax year, as well as carry forward any unused allowance from the last three tax years.
Will the 50% additional tax rate be removed?
This isnt something that affects a great percentage of people, but the Chancellor previously confirmed that the 50% tax rate was only a temporary measure and would at some point be removed. This is a very hot topic at the moment, and I will believe it when I see it.
Anyway, one way in which those of you earning more than £150,000 can reduce its impact is by making contributions to a pension scheme. Increasing the value of your pension scheme by £1,000 currently costs only £500, even less than it costs higher rate taxpayers. It isnt quite as clear cut as this and I would have to discuss your particular circumstances with you.
The ability to make use of unused contribution allowances from previous tax years will be particularly useful for 50% taxpayers, as this group were most affected by the complicated “anti-forestalling” restrictions introduced by the previous Government. If you fall into this category, please have a discussion with me around this.
The Chancellor’s recent statements mean it looks unlikely that 50% tax will be scrapped in the very near future. However, if you are a 50% taxpayer the amount of pension tax relief available to you will also be restricted if the 50% tax rate is scrapped. So, if you are considering making pension contributions, doing so before the 50% tax rate is scrapped would potentially maximise the tax relief available to you!
Will limits be placed on the tax free lump sum?
Currently most modern pension funds allow for the option of receiving 25% of the pension fund as a tax free lump sum, and this has always been a very attractive feature for many clients. However, I often wonder why the phrase “Tax Free Cash Lump Sum” was replaced by “Pension Commencement Lump Sum”. Maybe that’s just me being cynical!
Restricting tax free cash would be incredibly unpopular with the majority of people saving in a pension and would therefore be counter productive, so I am not expecting changes to this any time soon.
