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Pension Tax Relief – Pension Reform

It is expected that the chancellor George Osborne will announce the outcome of a review of pension tax relief in the Budget on 16 March.
He has not confirmed what (if anything) will change, but according to reputable sources, including amongst others the Financial Times, he is working towards a plan which would see a single ‘savings incentive’ of between 25% and 33% for everyone.
If that is correct, higher rate taxpayers could lose tax relief worth up to £8,000 per annum whilst basic rate taxpayers could benefit from increased relief.
Higher/additional rate taxpayers
If you are currently paying tax at 40% or 45% you may wish to consider maximising contributions in the current year. There will potentially be a short window in which to maximise contributions and receive relief at your highest rate of tax, assuming that any new measures come into effect from 6 April 2016 and are not brought in immediately. Under current rules, 20% of contributions are automatically paid by the government and higher rate taxpayers can claim an additional 20%, additional rate taxpayers as much as 25%, through their tax returns.
The current maximum annual allowance for most people is £40,000. An additional rate taxpayer would receive relief of £18,000 reducing the net cost to £22,000, and a higher rate payer relief of £16,000 making the net contribution £24,000. Under a new system outlined above relief could be restricted to anything between £10,000 and £13,200 therefore an additional rate taxpayer could gain as much as £8,000 by taking appropriate action.
Any unused allowance from earlier years which can be brought forward could further increase the amount which could be paid.
Under current rules, basic-rate and non-taxpayers have 20% of their pension contributions paid automatically by the government. If the rumoured changes go ahead, this will change to somewhere between 25% and 33%. This could therefore be one of those rare occasions  when it makes sense to delay, from a tax perspective at least.
Delaying any planned additional payments to your pension fund until after the announcement could result in paying less to invest the same amount in your pension. For example, £800 paid now is worth £1,000 to your pension fund with the addition of the 20% relief. If the rate of relief is altered to 25% it would cost you £750 to invest the same amount, and £670 if the rate is 33%.  If no change is made, or it is to be introduced at some future date, there will still be an opportunity to use your allowance before the tax year ends on 5 April.
What’s the most I can invest now?
An annual allowance applies to pension contributions. For the majority of people this is £40,000 and covers contributions made since 9 July 2015, including any made by you and your employer.
However, if you are looking to maximise contributions before the Budget you can carry forward any unused annual allowance from the last three tax years (£50,000 for 2012/13 and 2013/14 and £40,000 for 2014/15). You must have had a pension in each year from which you carry forward (not including the state pension).
To receive tax relief, your contributions should be no more than your earnings in the tax year. For example, if you earn £100,000 you can invest up to £100,000.
Until such time as the Budget announcement on 16 March 2016 there is no guaranteed way of knowing if tax relief on pensions is going to change. As there will only be a three week period following the announcement in which to act, anyone considering making additional contributions should review their situation now with a view to acting, or not as the case may be, once any announcement has been made.
Balfour+Manson LLP are not authorised to provide financial guidance and this article is not a personal recommendation to invest, but simply highlights the possibility of maximising relief on pension contributions from a tax point of view. Any decision to invest should be taken only after seeking proper advice from your pension consultant and/or financial adviser.