How flat rate tax relief and the reduced lifetime allowance could affect you

Following the news last year that George Osborne was planning to scrap the higher rate tax relief available on pension contributions and replace it with a new system, details have emerged over the prospect of a flat rate system being introduced from 16 March 2016, leaving higher rate earners with a limited window in which to maximise contributions in this tax year.

Alongside the confirmed reduction in the lifetime allowance from £1.25m to £1m, this new announcement adds further pressure on higher earners, who will also see their annual allowance cut from £40,000 per year to £10,000 via a tapering mechanism. Should the new flat rate be introduced, those in the 40% and 45% tax brackets could see the predicted value of their pensions decrease by thousands of pounds.

The flat rate system has been created as an incentive to workers on the lowest tax band to save more for their pensions, as their government-funded contribution is set to increase to between 25% and 33%.

It is yet to be confirmed whether the Chancellor will announce the new rate in this year’s budget or wait until his Autumn Statement, as the option for an alternative Pension ISA has yet to be completely ruled out. However, with the flat rate system mooted to be the most likely option, higher earners, we strongly advise all of our clients to talk to your advisor before tax year end in order to maximise benefit from the existing 40% and 45% relief rates.

If you would like to discuss making early contributions to your pension, please contact your Finura Partners advisor.