Why is George Osbourne considering a change to higher rate pension relief?
George Osbourne is looking to make savings wherever he can, and tax relief costs the government an estimated £34bn a year.
How do high earners benefit from tax relief?
For basic rate taxpayers, tax relief is available at a rate of 20 per cent. So if £400 is paid into a pension, HM Revenue & Customs would add an additional £100.
But higher rate taxpayers receive 40 per cent relief, and those who earn more than £150,000 receive 45 per cent.
So as well as perhaps being in a better position to save, higher earners also receive a significantly larger top-up. For example, to receive a £10,000 contribution from the government, an additional-rate taxpayer would only have to pay £5,500 into their pension.
What’s going to change?
The Treasury recently completed a consultation, and their findings will be reported in the coming weeks – most likely during Osbourne’s autumn statement on November 25.
The government’s intention is to find a way to simplify the tax relief system, making it less expensive and more sustainable in the long-term.
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It is not yet known what changes will be implemented, though experts predict that any one of the following may be introduced:
- Tax relief is scrapped outright to be replaced by a new system
- A flat rate for all taxpayers – possibly standing at 33 per cent
- A new pension Independent Savings Account (PISA), contributions to which would be taxed upfront, but all subsequent investment growth and withdrawals would then be tax free
On top of this, some other important changes will soon take effect. There’s a limit to how much your pension can be worth over your lifetime, which currently stands at £1.25m. Next April, this limit will drop to £1m.
The annual tax relief allowance is also set to change come April. In 2015-16, the annual allowance is £40,000. But from next April, savers will lose 50p of this £40,000 for every £1 they make above £150,000.
So what should I do?
Act now and take advice. You may wish to pay an additional pension payment in advance of the Autumn statement to protect your higher rate relief or look at the other opportunities to pay more into your pension before April next year.
Jill Evenden is the MD of EBS Accountants.
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