Will pension tax relief change again on Budget Day?


Mar 04, 2016


Budget & Autumn Statement Pensions Tax

There has been a lot of speculation that the Chancellor may announce further major changes to tax relief on pension contributions in his March Budget, based on consultations with the pensions industry.

Under the current rules your individual contributions can save you tax at your highest marginal rate, and also help you avoid losing your £10,600 personal allowance by reducing your adjusted net income. A £8,000 pension contribution by a higher rate taxpayer results in £2,000 (20%) being added to their fund by HMRC = £10,000 gross. The £10,000 gross contribution would then result in a £2,000 tax refund, so the net cost for a higher rate tax payer is just £6,000.

However, it is understood that the Government is now considering introducing a flat rate of pension tax relief of between 20% and 33%. This would be good news for basic rate taxpayers, but higher rate taxpayers would lose out. If, for example, a 30% rate of relief was introduced, a £10,000 contribution would cost £7,000, with no further relief.

Other suggestions are that you may no longer be able to agree with your employer to sacrifice part of your salary, in exchange for an additional tax free employer pension contribution. Another possibility is that tax relief on contributions will be abolished and in exchange you will be able to draw money from pension funds tax free. This change would make a pension scheme more or less the same as an ISA and prove costly for higher rate taxpayers.

The starting date of these possible changes is uncertain but they may be effective from Budget Day on 16th March, so you should consider making pension contributions before then to be certain of getting the tax relief.