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The Chancellor is due to deliver the Budget in the autumn of 2018.

In relation to pensions, in a July 2018 report the cross-party Treasury Select Committee called for the government to seriously consider (a) replacing the Lifetime Allowance1 with a lower Annual Allowance2 and (b) introducing a flat-rate of tax relief on pension contributions, and promoting this as a “bonus” to improve engagement with the wider public.

The removal of the Lifetime Allowance would be welcome for many high net worth savers, but changes to the current pension tax relief system (which provides relief at an individual’s marginal rate of income tax) might be less welcome.  With the majority of tax relief on pension contributions currently received by higher and additional rate taxpayers, it is argued a lower flat rate of tax relief could reduce the overall cost of tax relief to the Exchequer, to help meet the as-yet-unfunded extra commitment to the NHS, while directing future tax relief more towards those on lower incomes.

However, the abolition of higher and additional rate tax relief is a reform that has been suggested on numerous occasions, with challenges to overcome in relation to how this could be implemented for Defined Benefit schemes, employer contributions and salary sacrifice arrangements.  It could also trigger a backlash from traditionally Conservative-voting middle-class savers, at the same time as the government has only a wafer thin working majority in the House of Commons.

For higher and additional rate taxpayers with available liquidity and headroom relative to the Lifetime Allowance, we believe a prudent approach would be to top-up pension savings in advance of the autumn 2018 Budget, to protect against the possibility of changes.

In the current tax year, the Annual Allowance for those earning over £210,000 per annum is just £10,000 gross.  However, in certain cases, it is possible to carry forward unused pension Annual Allowances from the previous three tax years, sometimes enabling a contribution of up to £70,000 gross in the current tax year.  For an additional rate taxpayer, this could generate tax relief of up to £31,500, reducing the cost of a £70,000 contribution to just £38,500.

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Saunderson House provides award-winning independent financial and investment advice to professionals in the City of London, specialising in advising Partners of the leading law and accountancy firms and Barristers.

If this note is of interest, and you would like some advice on how to manage your pension arrangement, please do contact me.

 

Notes

  1. The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.
  2. The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It is based on your earnings for the year and is capped at £40,000, though for those earning over £150,000 pa is gradually tapered down to £10,000 pa as above. In some cases unused allowances from previous tax years can be used.

This post is for general guidance only and represents our current understanding of law and HM Revenue and Customs practice as at 22 August 2018.  We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering into any transaction.  Levels and bases of, and reliefs from, taxation are those currently applying but are subject to change and their value depends on the individual circumstances of the investor.

About The Author

Charlie Sage
Charlie advises on all aspects of financial planning, including long term strategy, investment portfolio construction, taxation and technical matters. ...
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