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Tax Relief On Pension Contributions – The Impact of Government Changes

Pension tax relief has long been a point of political debate. Left leaning politicians would argue that it is the wealthiest members of society who benefit most from pension tax relief. Whereas “right” leaning politicians argue that tax relief is an entirely appropriate incentive for individuals to privately fund the cost of their retirement.

Political imperative = Political consensus

As with all elections, our politicians missed no opportunity to make “un-costed” promises in all manner of areas. Ed Milliband’s “stone tablet” being a particularly memorable addition, albeit perhaps David Cameron’s last minute promise of legislation prohibiting increases in VAT, Income Tax & NI may ultimately be the greater “millstone” of the two.

However something unusual did happen during the election campaign. For the first time we saw political consensus on the subject of pension tax relief, with all sides of the political spectrum proposing limits to tax relief for high income individuals.

With election “promises” to be paid for and large deficits remaining, “political imperative” perhaps best explains this new found “political consensus.”

Conservative Pre-Election Proposals:

If implemented, David Cameron’s pre-election proposals would limit the amount that those with income exceeding £150,000 can contribute to their pensions. This would be achieved by reducing the annual allowance from £40,000 to £10,000 gradually for individuals with income in excess of £150,000.

Thus every £1 of income over £150,000 would reduce an individual’s annual allowance by 50p subject to a minimum annual allowance of £10,000.

Lifetime Allowance Reduction (2016/17)

Tax relief on pension contributions is governed by both the annual allowance and the lifetime allowance (LTA). When considering the pros and cons of pension contributions one must also consider whether the additional pension contribution might ultimately result in an LTA charge at a later date.

It should be noted that George Osborne announced a reduction in the LTA for pensions in his March 2015 budget. The reduced LTA will be £1million and takes effect from 6 April 2016. This follows a general trend of reduction of the LTA in recent years.

Our View

That politicians are seeking to limit tax relief for higher earners should come as no surprise. Indeed private pensions have long been an attractive target for governments. (You may recall Gordon Brown’s fabled “Pension Raid” in 1997, when he abolished the dividend tax credit for pensions).

When considered against the alternative (i.e. breaking their election promise not to increase taxes), limiting pension tax relief for a comparatively small number of “wealthier” voters appears a more political expedient solution for the Government.

It should be understood that this note is based on our understanding of the conservative’s pre election proposals on tax relief. The actual position will not be known until the budget is delivered on 8th July.

Whilst we can’t be certain about what Mr Osborne will announce on 8th July, we feel safe in saying that pension tax relief is unlikely to become anymore generous for high earners. We therefore feel that high earners have everything to gain by making pension contributions now, and potentially a great deal to lose by waiting until after the budget.

Finally, whether you can, or indeed should, make a pension contribution will depend on your personal circumstances. If you are thinking of making a pension contribution you should seek advice from your financial adviser.

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