Changes to pension tax relief delayed

The Government launched a consultation in the summer to review the current tax relief regime applying to pensions. This closed at the end of September and it was anticipated that the outcome would be delivered in the Autumn Statement, scheduled to take place on 25 November, but the Chancellor has confirmed that the response will be delayed until next year’s Budget, with the production of a new Green Paper.

This suggests that the changes being contemplated could be significant, but the delay indicates that a thorough review is being undertaken and that the various considerations put forward are being properly assessed and not rushed through.

The consultation included a suggested move to taxation on a similar basis to that of an ISA - referred to as Taxed, Exempt, Exempt (TEE). Pensions currently operate on an Exempt, Exempt, Taxed (EET) basis and a move to the ISA style of tax treatment could prove a significant challenge, as the existing structure has been in existence for some decades and may be costly to alter. Even if the legacy issues are successfully dealt with, will this really encourage people to save more for their retirement?

A further consideration is a complete overhaul of how tax relief is granted.

The idea of applying relief at a flat rate of tax for all individuals making pension contributions certainly seems simpler to understand, especially in comparison to the current tiered rate system of 20%, 40% and 45%, but if the suggested flat rate of 30% relief is introduced this would only provide a tangible benefit to basic rate tax payers and higher earners would lose out against the current system. Having already been subject to a number of restrictions in recent years and with tapering relief applicable to those earning over £150,000 from April next year, this may make pensions even less attractive to those at the higher end of the earnings spectrum.

This delay does perhaps provide a window of opportunity in which to make pension contributions and make certain of receiving the higher rate relief. Those thinking of doing so may be well advised to seek financial advice sooner rather than later, to make the most of the available tax breaks while they’re still definitely available.

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