There has been considerable speculation as to the future of tax relief on pension contributions for some time now and this is seen by many in government as ‘low hanging fruit’ when it comes to addressing the deficit.
At the July 2015 Budget, George Osborne opted to restrict tax relief on pension contributions for those earning more than £150,000 and this will come into effect from 6 April this year. An individual earning over £150,000 will have their current annual allowance of £40,000 reduced by £1 for every £2 they earn over the £150,000 threshold. This will continue up to a maximum of £210,000 where the annual allowance will have been reduced to £10,000. Anyone earning over £210,000 will be subject to the £10,000 annual allowance automatically. Income will not only include earnings, but also pension contributions in many cases, rental, investment and savings income including dividends.
Over the past few weeks, there has been growing speculation that Mr Osborne may be about to come back for a second bite of the pensions’ cherry, with a possible announcement at the forthcoming March 2016 Budget. It is strongly rumoured that tax relief at the marginal rate (up to 45%) could disappear forever, and be replaced by a form of savings credit, widely mooted to be between 25% and 33% of the contribution amount, and subject to a maximum cap. Whilst this could benefit basic rate taxpayers, higher and additional higher rate taxpayers would be worse off.
We would stress that this remains purely speculation at this stage. However, our view is that if you still plan to make a contribution in 2015/16 and have the funds available, it would make sense to do so before the next Budget on 16th March 2016. It’s also worth remembering that as part of the pension changes introduced in the July 2015 budget, you may benefit from having a higher annual allowance in this tax year which could be worth taking advantage of sooner rather than later, together with any annual allowances not used in the last three tax years. For further information, please contact your usual financial planner at Paradigm Norton.
RMT Ref 136/02.16/SL