Budget 2020 - What now for pensions tax relief?

After a Cabinet reshuffle that saw the Chancellor resign just a few weeks before the Budget, there will be several reasonable and looming questions on the minds of taxpayers: what are the new Chancellor’s policy plans? How involved will Number 10 be in the decision-making process? And what tax changes already in the pipeline will see the light of day? 

Before his departure, Mr Javid was rumoured to have been considering cutting the rate of pensions tax relief for higher earners from 40% to 20%. Whether his replacement, Rishi Sunak, will think better of this mooted £10 billion raid on people's retirement savings remains to be seen.

However, what is clear is that the upcoming March Budget is likely to involve some tough choices if the government is avoid breaking its promises not to increase Income Tax, National Insurance or VAT.

Pensions tax relief has been under constant fire for many years with commentators suggesting it favours higher rate tax payers while not incentivising basic rate tax payers enough. Former Chancellor George Osborne floated the idea of a flat rate before abandoning his plans, fearing loss of support before the EU referendum. Philip Hammond also toyed with the idea of cutting some of the £40 billion of pension reliefs.

But having won a number of working-class Labour strongholds across the north of England, the party may now feel it has a mandate to cut tax perks for wealthier individuals and reward less well-off voters who backed the Conservatives in December’s election. It would also have the potential to raise billions for the Treasury, helping to offset the costs of challenges such as HS2 and Brexit.

“Given the overall cost of tax relief for pensions is around £40 billion a year, it will be a tempting target for a revenue-hungry Chancellor at the start of what looks set to be a five-year Parliament, just as it was for George Osborne after the 2015 election,” says Claire Trott, Head of Pensions Strategy at St. James's Place.

How tax relief works

When paying into a personal pension, you get an automatic top up of 20% from the government. This means that if you pay a contribution of £80, a total contribution of £100 is paid into your pension pot. If you're a higher rate taxpayer, you can claim a further 20% tax relief from HMRC. It is this extra tax relief that may be up for review in the upcoming Budget.

Restricting tax relief to the basic rate of 20% means higher rate taxpayers would effectively be taxed twice — losing half the tax relief on money paid into a pension, then being taxed up to 40% on the money coming out in retirement. That would deter many higher earners from pension saving, including those earning between £50,000 and £80,000 whose Income Tax bills Mr Johnson pledged to reduce when standing to be leader of the Conservative party.

Many experts argue that it would be particularly unfair on younger workers who have not had the chance to get higher rate tax relief on their pension contributions and would miss out on it in the future.

Perhaps a simpler option would be a further cut to the annual allowance – the amount you’re allowed to save into your pension in a single tax year and still receive tax relief. This is currently £40,000 for many people, so a cut to £20,000, for example, is plausible. 

Any speculation should be taken with a pinch of salt, especially given the practical challenges of changing the current system. Nevertheless, the cost of delivering health, education and social care is projected to go on rising, and the pressures on other areas of public spending are not going away. With such a big majority and no threat from the opposition anytime soon, now may be the government’s one chance to do something radical.

“Any changes can’t be backdated and we don’t see any chance of greater tax reliefs being brought in, so if you are a higher rate taxpayer, you are very unlikely to be in a worse position if you maximise this year’s pension saving today,” says Trott.

 To read the original St. James's Place article please click here: https://www.sjpinsights.co.uk/article/what-now-for-pensions-tax-relief

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