Pensions - Articles - Budget 2016 – predictions and comments from Hymans Robertson

 While tax relief reform is off the table in this Budget, this leaves a horrendously complex system of annual and lifetime allowances in place from April which will hit 2% of taxpayers hard by 2019.

  

 Commenting on complicated system of Annual and Lifetime Allowances for pension savings, Chris Noon, Partner at Hymans Robertson, said: “If we see no other significant changes to pension tax relief this year, in April we will see a horrendously complex system of annual and lifetime allowances come into force. Everyone has been taking a ‘wait and see’ approach in anticipation of wider changes to tax relief, assuming this was a transitional issue. Now that the Chancellor has, for now, capitulated on wider tax relief reforms, these complexities for higher earners are here to stay. Employees and their employers need to turn their attention to this as a matter of urgency.

  

 “At the moment very few people are actually affected, but this is set to change. By 2019 around 600,000 to 700,000, or 2% of taxpayers will be hit hard by this. It can affect those earning £90k per annum and sometimes less, due to the complicated way income is assessed by the Government.

  

 “Currently individuals can take advantage of any unused pension saving annual allowance (AA) from the previous three tax years, known as ‘carry forward’. This is softening the blow of the changes in the interim. But by 2019 higher earners will be feeling the pain.

  

 “The Government expected to save £1.18bn by 2019/20 from the AA change. Given 2% will be affected once the carry forward allowances run out, this is more likely to be in excess of £2bn.

  

 “There is always the risk that the Chancellor could scrap carry forward. If this happens, the Government will save even more and the pain will be felt even more acutely and much sooner.

  

 “It’s very hard for people to plan and avoid penal tax charges. They just don’t know how much they could earn in any given year, as they don’t always have clear sight of their bonus or income from other assets, all of which are taken into consideration in determining whether or not you breach the £150k threshold.

  

 Explaining how pension tax relief could be simplified, he added:
 “There is still a pressing need to simplify what is a hideously complex system. The most obvious way to do this would be to implement a capped rate of tax relief. If this was set at 40%, everyone would still have an incentive to save. We could then scrap the complex system of annual and lifetime allowances. Added to that, the Chancellor would then have the lever of changing the rate of relief if he was keen to cut the cost of providing it in the future. Unlike a pensions-ISA or flat rate regime, this could be implemented really easily as the systems are already in place. When the effects of the annual allowance begin to be more widely felt, we’re certain that support for this as a solution will begin to build.”

  

 Discussing the potential £13.8bn prize from ending National Insurance relief on employer contributions to pensions, Patrick Bloomfield, Partner, said:

  

 “An obvious target to finance plugging the deficit is the removal of National Insurance relief on employer’s pension contributions. If the Chancellor did this, by the Government’s own estimate it would raise around £14bn per annum. It wouldn’t affect pension tax relief and the impact on individuals would be marginal – particularly his heartland of voters, higher rate tax payers. It would essentially be a tax on jobs, but it wouldn’t be a ‘vote loser’.

  

 “It wouldn’t be a surprising move for a couple of reasons. First, he hasn’t shied away from passing Government spending problems on to employers – the most recent example is the Living Wage. Second, using National Insurance is a classic solution to tax raising when there isn’t scope to increase income tax.

  

 “Ending relief on NI would equate to a 1% to 2% increase in salary costs to employers. This would come at a time when employment levels are at the highest levels we’ve seen in some time. It would mean that employers would have to cut back on pay budgets for a couple of years.”

  

 “The infrastructure is largely in place to make this happen and the exemption for Class 1A and Class 1 employer contributions would easily be revoked. Defined Benefit (DB) accrual contributions would need some work to measure the value, but the newly aligned tax year Pension Input Periods will make this much easier. This could also be rolled-out across the self-employed through individual tax returns. It also leaves DB deficit contributions untouched, so the Chancellor couldn’t be accused of hampering employers’ efforts to repair DB deficits.

  

 “Clearly there are big implications. Businesses would need to prepare to absorb the cost. Or they could re-design pension plans to accommodate the loss of savings and still give employees an adequate level of retirement income. Either way, if this happens, business leaders will need to quantify the problem and develop solutions post haste.”