Big changes to pension allowances are expected to be introduced in the Budget 2016 on 16 March, with top earners set to be the main target. Although the Treasury is stating that a final decision has not yet been made, a reduction in tax relief for higher earners is almost certain. This follows George Osborne’s announcement in the autumn statement that high earners should anticipate a curtailment in the tax-free contribution they can make to their pension each year.
Under the current system, workers benefit from pension tax relief at the same rate as their income tax - 20%, 40% or 45%. The Treasury is considering a number of options but it is anticipated that those earning between £150,000 and £210,000 a year lose out dramatically.
One option would be to limit gradually their annual tax free pension contribution allowance from £40,000 to £10,000 for those earning between £150,000 and £210,000. However, also on the table is a potential new system of flat rate tax relief for all earners, which would mean that regardless of the rate of income tax you pay, you would receive tax relief at one rate.
The flat rate is likely to be set between the current higher rate of 40 per cent and the basic rate of 20 per cent at anywhere between 25-33 per cent. It has been suggested that this will encourage low and middle-income earners to save more and it is expected to combat Government concerns that these workers are not saving enough for retirement.
Clearly, both options would affect the future levels that top earners can contribute to a pension from April. Ultimately, therefore, these individuals will see their retirement pots plummet excessively.
If an individual exceeds the annual allowance in any given year, it will not be possible for that same individual to receive tax relief on any contributions that exceed the limit. In fact, an annual allowance charge will be added to the remainder of his or her taxable income for the tax year in question.
With changes to the tax breaks on pensions set to come into play imminently, it is vital that top earners take advantage of the current rates of tax relief before April 6th 2016. It is also important to note that by using unused allowances from previous tax years, it is possible to make contributions of up to £180,000 during the current tax year.