Pensions tax relief
There has been a great deal of speculation that pension tax relief for higher earners would be reduced to 20%. However, such a change would be complex to administer and have many unintended consequences including:
• Potential for people to be double taxed.
• Undermining auto-enrolment as higher earners see the change as a disincentive and opt out of their pension. They may choose to direct their savings to alternative vehicles such as ISAs.
• Lead to difficulties in use of salary exchange which means it would likely be scrapped.
• Could act as a prelude to a shift towards a more ISA-like tax structure.
• Moving to a single rate of tax relief would also be difficult for big civil service pension schemes using net pay arrangements. This is where the employer deducts the employee contribution from the employee’s pay before applying income tax. These employees therefore get full tax relief immediately at their marginal rate. Moving to a flat rate would mean systems would need to be changed which could prove difficult.
Complex web of tax allowances are a more likely target
It is more likely that government will look to raise money by tinkering with the complex web of tax allowances. For instance:
• The annual allowance could be reduced from its current level of £40,000.
• The lifetime allowance could be removed or increased. This could provide a welcome diversion from any cut in the annual allowance. Interestingly the statutory instrument to confirm the lifetime allowance for 2020/21 has yet to be published. This is strange as the calculation of the lifetime allowance is written into law, so there’s no reason to delay it.
• The tapered annual allowance threshold may be increased. On the face of it this could prove popular given the ongoing issues experienced by schemes such as the NHS. However, in reality this may have limited effect if the annual allowance is reduced.
Clare Moffat, head of business development at Royal London, said: “Every Budget brings speculation that government will make major changes to pension tax relief as a quick way of raising money. However, making changes to tax relief is hugely complex and likely to cause many issues. It is far more likely that the government will continue to tinker with tax allowances, especially given the pressure it is under to solve the issues experienced by NHS workers with the tapered annual allowance.”
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