With 2020’s Budget less than one month away, rumours are once again swirling that high earner’s pension tax relief will be cut.
According to media speculation, the government will potentially look at the introduction of a flat rate of pension tax relief set at 20% for all earners. This would negatively impact higher earners as they would no longer receive 40% or 45% tax relief on part of their pension contributions.
Currently, people putting money into a pension receive tax relief, meaning their contributions are effectively topped up by the Government. However, relief is granted at the saver’s marginal rate meaning people earning more are able to receive more from the Treasury.
It is therefore wise for those high earners (40% or 45% taxpayers) with the ability to contribute one-off sums to their pension consider doing so now as a precaution before reliefs and allowances are potentially cut.
There is a possibility that any announced changes to the pension system may become effective immediately, which is why planning ahead would seem prudent.
The primary way in which higher earners can add significantly to their pension funds is by carrying forward unused allowances from previous years. The unused allowances of the past three tax years are permitted to be “carried forward” in this way, but the interaction of the carry-forward rules and the taper rules complicates the process. It is therefore wise to seek professional guidance to plan wisely ahead of the Budget.
It is worth highlighting that the proposals to restrict pension tax relief only relate to contributions paid personally.
Many of our clients are in a position of control within their own business and have the ability to pay contributions from the company as part of their remuneration package. In the right circumstances this will remain an extremely tax-efficient method of receiving tax relief on pension contributions and a useful profit extraction tool.
For those in employment, it may be possible to engage in a salary sacrifice arrangement with your employer, which is likely to provide a boost to your pension contributions by virtue of the savings on National Insurance Contributions and could effectively circumvent the proposed restriction on pension contribution tax relief.
As with all matters in the financial planning area, particularly relating to pensions, it would be sensible to adopt a measured approach and to consider all of the available options before making any specific decisions, particularly if substantial amount of funds are involved.
For further advice or a discussion about your personal situation, please don’t hesitate to get in touch with a member of our wealth management team on 01254 679131 or via email at wealthmanagement@pmm.co.uk.
