Recent leaks from the Treasury suggest that higher rate tax relief will remain for now but, with key economic indicators moving against him, Mr Osborne is unlikely to pass up the opportunity of getting his hands on a slice of the nation’s pension savings. So what might he do?
He could tinker further with the annual allowance calculations. Perhaps reduce the “income” trigger for a reduced annual allowance to much less than the current £150,000 figure. Or restrict the ability to carry forward unused allowance from previous tax years. Such changes might deter some people from making contributions and could raise a bit more tax from those in defined benefit schemes who accrue benefits worth more than the annual allowance.
A more significant change would be to levy National Insurance on employers’ pension contributions. This would raise considerable sums and would blunt the effectiveness of “salary sacrifice” arrangements whereby employees agree to receive a lower salary in return for their employer paying their pension contributions. If he was feeling particularly radical, he could merge income tax and National Insurance together – something that has been talked of for many years without any action.
As long as I can remember, there has been talk of the chancellor removing the tax-free lump sum - described by Nigel Lawson when he was chancellor as a “much-loved anomaly”. Being able to take 25% of the pension pot tax-free once you reach age 55 gives opportunities to those who have the time, money and inclination to game the system to their advantage. Stopping such behaviour is difficult without removing the lump sum altogether – and to do that would remove one of the real incentives for people to save into a pension. So my money is on the much-loved anomaly remaining for now.
In Ireland, the government introduced a compulsory levy on pension fund assets. It was as much as 0.75% at its peak and such a levy on UK pension fund assets would potentially raise as much as £10 billion a year. George must be tempted.
If he shies away from such a blatant raid, he might look to tax pension funds’ investment income. Norman Lamont started that in 1993, when he reduced the amount of ACT that pension funds could reclaim and nobody really noticed. It wasn’t until Gordon Brown finished the job in his 1997 budget that everyone realised what large sums were involved.
So, whilst for this year pensions taxation might not be in for the sort of radical changes that Michael Johnson wants to see – the infamous “Pensions ISA” – I am sure that the budget will introduce some changes. We may need to study the small print to find out exactly what they are and it may be some time before their full impact is appreciated. But with well over £1 trillion sitting in pension fund assets, I think a cash-strapped chancellor is going to find temptation hard to resist.
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