What can we expect from the 2018 Budget? Will pension tax relief be cut?
The 2018 Autumn Budget is set for Monday 29th October – a little earlier than expected but brought forward by the impending Brexit negotiations.
Pension Tax relief
Yet again one area, that is thought to be challenged is the rate of tax relief on pension contributions, but will this year be the year of change?
Currently higher rate tax payers get relief at 40% and basic rate tax payers 20%. What is mused is a flat rate for all tax payers as the current system is deemed expensive and unfair to the lower paid. Rumours up to last year’s budget were that a rate of 33% was more likely, but would the lower paid be more likely to increase contributions if the tax relief was more generous?
This year’s budget rumours that the Chancellor may scrap higher rate pension tax relief altogether, but this would have devastating effects on the value of people’s future funds and would almost seem to be a move in the opposite direction to what auto enrolment is trying to achieve.
Pension tax relief is expensive, so a radical scrapping of higher rate relief would be cost effective but also extremely unpopular. Would a reduction in the annual allowance from £40,000 perhaps be one of the easiest changes? Dove tailed with a change in the taper for higher earners? Possibly higher or lower depending if the incentive was to lessen the blow or increase tax savings further?
This would deliberately target the wealthier savers and therefore may be a policy that is deemed more widely acceptable. The government needs to find more funds from somewhere to uphold its promises to the NHS, but any cut that would reduce pension savings, could have longer term consequences.
Carry Forward Rules
If you have a patchy contribution record, there is a possibility to use the annual allowance for the previous three years, so in one year an individual could contribute £160,000, this is another area that could be targeted.
Life time Allowance
The life time allowance currently sits at £1,030,000 and is index linked based on CPI. The inflation increase element is a recent policy change so one that would seem unlikely to change again, but it is one that would fit nicely with a reduction in the annual allowance.
Ros Altman former pensions minister recently wrote that her view is that Pensions tax relief could be left well alone, and that her prediction is that the Chancellor might well steer clear of radical changes that could upset millions, especially with the Brexit uncertainties. Her view is that the likeliest change could be the reduction in the annual allowance.
As with any budget, other than the chancellor himself, no one knows what will happen on the day. As always, we will be watching with baited breath. Ensors will be covering the budget live on Monday, please follow the updates on our live twitter feed @EnsorsBizTax.