Are changes coming to pensions tax relief for high earners?

In one of our recent articles addressing the payment of Inheritance Tax (IHT), we drew attention to proposals by the government to introduce an additional property only nil-rate band, funded by restricting tax relief for high earning individuals.

The proposals are laid out in the new government’s manifesto and whilst the outcome will probably be determined in the Budget on 8 July, the potential impact could be significant for some pension savers, which we explore below.

Currently, all UK residents under the age of 75 making payments into a pension scheme will receive 20% tax relief on contributions up to the value of their earnings (subject to the Annual Allowance limit of £40,000 or £3,600). For every £80 paid into a pension scheme the Government will add £20, bringing the total contribution to £100 invested. If you are a higher rate or additional rate tax payer, you are able to reclaim the extra tax relief via your self assessment tax return.

Currently, a higher rate tax payer paying 40% tax on their earnings and wanting to make a £15,000 lump sum payment into their pension only needs to pay £12,000, as £3,000 will be added by the Government, with an additional £1,523 claimed back via their self assessment tax return. A 45% tax payer making the same contribution will be able to claim £3,750 back via self assessment, but this could all change if the government proceeds with its proposals.

It is reported that the Government spends £34 billion a year on pension tax relief and is planning to cut the tax relief for those who earn more than £150,000 per annum.

This will be brought about by reducing the current annual allowance of £40,000 by £1 for every £2 earned over £150,000, and for those earning £210,000 or above, a £10,000 annual allowance will apply. You can see the impact of this in the example below.

Earnings Contribution Current Tax Relief Tax Relief under proposed rules
£170,000 £40,000 £17,000 £13,500
£210,000 £40,000 £18,000 £4,500

As you can see, there is a significant difference between the tax relief allowable under current rules in comparison to the proposals, which could be introduced as early as 8 July when the Chancellor’s next Budget is delivered.

So what can high earners do in the short term?

You can maximise your pension contributions and carry forward unused tax relief further if you have not used the full annual allowance from the last three tax years. Some individuals can invest up to £180,000 now by taking advantage of this carry forward facility, on the proviso that you have sufficient earnings in the current tax year to support the level of contribution.

If you are at all concerned by these potential changes, or wish to explore how you can maximise your pension contributions using a carry forward facility, you should seek financial advice now. This can be a complex exercise which needs to be negotiated with some care, so it usually pays to seek professional advice to make sure things are done correctly.

Speak to us about your own circumstances. You can find and contact your local Financial Planning Consultant here.

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