Important Pension Changes For Higher Earners

Since initial changes to pensions tax relief for high earners were announced in the Summer Budget, further potential amendments have been publicised, which could further impact how much money you can contribute annually to your pension pot. Although no changes were announced in the Autumn Statement, pensions tax relief remains under review.

Having confirmed that additional rate taxpayers would see their annual allowance cut from £40,000 per year to £10,000 via a tapering mechanism, the government is now looking at whether to keep the current system of tax relief or to make new changes, such as the abolition of tax relief for high earners altogether.

The good news is that there is an opportunity to maximise contributions in this tax tear before any changes come into effect with some investors having a double pension allowance this year. However with many investors leaving their pension contributions until later in the tax year, it may be prudent to act sooner in order to maximise benefit from any remaining allowances.

The £40,000 allowance usually applies across a whole tax year (6 April to 5 April the following year), but, since the new changes were implemented on 9 July, a new £40,000 allowance effectively applies between then and 5 April 2016. If you made contributions from 6 April 2015 to 8 July 2015, even if you used the full £40,000 allowance, you might be able to invest more this tax year.

In addition to a reduction in the lifetime contribution allowance from £1.25m to £1m, and the tapering of relief for those earning £150,000 per annum and over, the government is looking at number of reforms to replace the current system.

These include:
1. A Retirement ISA – you pay in from taxed income, with no pension tax relief, but it’s tax-free when you take it out, as opposed to the current 25% tax free limit. And in between it receives a top-up from the government.

2. A flat-rate of tax relief regardless of earnings – this has been suggested at anything from 25% to 33% – and you still pay tax when you draw your pension out.

3. Cap the amount you can take out each year – this would mean those with larger pension pots, whose 25% tax free withdrawal equates to a considerable sum, would be restricted on how much they can take out at the 25% relief rate

4. Caps on paying in – with the annual cap currently set at £40,000 and a lifetime allowance of £1m from April 2016, one suggestion is that these are replaced with a lower annual allowance of £25,000, severely restricting what high earners can contribute each year.

With speculation over further changes adding more uncertainty to our pension futures, our advice is to act now and take advantage of existing allowances, as the likelihood is that tax relief will only go down in order to plug the budget gap.

If you would like to discuss making contributions to your pension in this tax tear, please contact your Finura Partners adviser.