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Could you be a target of the Autumn Statement?

Bruce SaundersonAs Westminster seeks additional ways of addressing the UK budget deficit, pension savings have found themselves once again in Chancellor’s line of sight.

Government figures show the cost of tax relief for pension savings enjoyed by both employees and employers sits at around £27 billion for the 2013/2014 tax year. And this figure jumps to £34 billion when the tax exemption on investment income enjoyed by pension funds is added.

At a cost approaching the size of the Defence budget it is not unsurprising that high earners will further face restrictions on their tax favoured pension savings from April next year.

Two new restrictions are to be imposed.

Firstly, the overall cap on pension saving will reduce from £1.25 million to £1 million. Funds in excess of this will suffer tax of up to 55%. While the concept of such a savings pot will be alien to some, this may affect many fortunate enough to benefit from final salary arrangements. To test the new limit, annual pensions are multiplied by twenty. High earning public and private sector workers for example will be caught if their pensions exceed £50,000 a year.

It is expected that for those already exceeding £1 million, some form of protection from the changes will be made available although HMRC is yet to provide detail.

Those with smaller funds will need to consider whether the future value of their pension pots, given reasonable investment returns, will breach this limit by the time they have retired in, say, 10 or 20 years’ time.

In addition to this, annual pension savings, recently reduced from £50,000 to £40,000, will also be capped for those with total income in excess of £150,000 a year. Crucially, this captures income from all sources, not just employment. The test for the income limit includes the amount saved into the pension itself by either employees or employers. For every £2 of income in excess of £150,000, the Annual Allowance for pension saving will be cut by £1 until those with income of £210,000 will be restricted to an overall annual entitlement of £10,000.

This poses issues for employers who will need to assess whether the payment of large pension contributions as part of employee remuneration will now cause tax issues for their employees and seek to offer alternative arrangements.

The cuts may not bite immediately as HMRC will continue to allow the carry forward of unused pension allowances from the three previous tax years. Using this, high earners should consider the possibility of making large contributions whilst they can before next April although it is important to note that tax relief will be restricted to the amount of employment income in the current tax year.

Additional planning measures could include the switching of income producing assets to spouses which itself would not incur tax charges but may reduce the income of the pension saver and the re-allocation of pension savings to spouses not using their full allowances.

As end of year tax planning begins to rise up the agenda ahead of the 30 December online self-assessment and 31 January postal self-assessment deadlines, it will become increasingly important for individuals to not only understand new liabilities but to ensure they have plans in place to deal with these effectively.

Bruce Saunderson is an investment advisory leader at PwC in Scotland

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