Last orders for generous tax relief on pension contributions?

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Published on
19th September 2020

It’s something we draw attention to every year, but this time it feels more important and perhaps more under threat than normal.

As Rishi Sunak prepares for what must feel like a wartime budget, he will no doubt be scratching around for areas to save money and to raise taxes from the least unpopular places.  The government’s response to Coronavirus has blown a huge hole in the nation’s finances and somehow the Chancellor must start balancing the books.

It’s long been a tabloid headline that tax relief on pension contributions, particularly for higher and additional rate taxpayers, is an area of focus.  These tax reliefs are reported to cost the treasury around £34bn each year, clearly a huge amount!

There are arguments on both sides of this debate.  If we don’t incentivise saving into a pension scheme, then people are a lot less likely to save, throwing back the burden to the state when people hit retirement and don’t have funds to support themselves.

So what are Rishi’s options here?

Currently pension investors enjoy tax relief on contributions they make.   If you are a basic rate taxpayer the government effectively pays the cost of 20% of your contribution, 40% if you are a higher rate taxpayer and then 45% if your earnings exceed £150k per year.

It’s extremely unlikely that tax relief would be removed altogether but capping at 20% is often mooted and is likely to be under consideration at the Treasury.  In practice though this would be problematic to implement as many contributions are paid by employers direct into pension schemes or as part of salary exchange arrangements.  Any contributions paid by companies are paid prior to tax being deducted, meaning that tax relief at the highest rate is automatically achieved without needing to be claimed.  To get around this the government would have to make sweeping changes to the wider tax systems for anything to be effective here.

Another option is to reduce the amount we can pay into pensions each year.  Currently for most people a contribution of £40k is the limit of how much we can invest each year.  A few years ago this was £50k.   This limit is easy to change and would effect a smaller proportion of the population.  Perhaps this might be reduced to £30k?

Our view

Despite leaks and speculation, we never really know what will come out of a Budget.  Our view is simple: if you have funds that you are thinking of investing into a pension, then consider doing it now, before things may change for the worse.  If they don’t change, you likely haven’t lost anything.

Feel free to get in touch to speak to one of our financial planners if you are considering your options and not sure what to do.

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