Pensions Tax Relief – It’s the final countdown

With the budget just weeks away, high earners need to be ready. If your total income is over £150,000 (that’s income from all sources, including employer pension contributions), then you should be reviewing your pension fund now.

Two reasons why you need to act quickly:

• The pension contribution annual allowance will be reduced from £40,000 down to £10,000 from 6 April.
• Expectations that the Chancellor will announce changes to tax relief. There’s no guarantee of tax relief at 40% and 45% continuing.

The Government has stated it’s reviewing all options, including maintaining the existing tax regime. Pressed by the need to balance the country’s books, the Chancellor could equally look to save money by ending pension tax relief at 40% and 45%, in favour of a move to a flat rate.

A flat rate is speculated to be between the basic rate of 20% and 30%. And whilst it might take the pensions industry a period of time to implement the new rules, it wouldn’t be out of character for the Chancellor to announce interim measures immediately.

What does this mean?

Missing out on the current tax relief and allowances could be costly.

If tax relief is reduced to just 20%, the increased cost of a £40,000 pension contribution for a 40% tax payer would be £8,000. And, even if tax relief at the higher rates survives, the reduction of the annual allowance for a 45% tax payer equates to a loss in tax relief of up to £13,500.

You must consider maximising the current tax year’s annual allowance. Unused annual allowances from the last three tax years can also be used under the carry forward rules. The carry forward rules could mean the reduction in the annual allowance for some high earners is not immediately felt in future tax years. But relying on the carry forward rules could potentially mean missing out on tax relief at a higher rate, depending on what the Chancellor announces.

Do the right thing, maximise pension contributions whilst tax relief is at 40% and 45%. This really could be the final countdown!

For help on how to do this please contact your usual Cooper Parry contact on 01332 411163, or email Philip Rogers, philipr@cooperparry.com