Allowances may change

Pensions reforms could still be in Osborne’s plans

Craig Hendry 2Chancellor George Osborne may have postponed plans to change pension tax relief in the Budget, however he could still announce reductions to annual and lifetime allowances, restrict salary sacrifice, or extend the annual allowance taper.

Pension Annual Allowance:

What we know is that in recent years the maximum sum that can be contributed into a pension plan has reduced from £255,000 per annum 5 years ago to £40,000 per annum presently (excluding carry forward or changing pension input period before year end).

It is possible that this annual allowance could be reduced again thus limiting further the amount of savings that can be made into a pension plan and consequently the amount of income tax relief claimed.

Pension Lifetime Allowance:

The chancellor had previously announced that the total pension savings that an individual could accumulate over their lifetime, without attracting a tax charge on the excess, was being reduced from £1.25 million to £1m.

This means that many more pension plan holders are going to be affected than those under previous reductions in the lifetime allowance.

For example, consider a 45-year-old with a current pension fund of around £220,000. Assuming that they contribute £1000 per month into a pension plan and achieve an average investment growth rate of 5% per annum, they will accumulate a pension fund of £1m by the age of 65.

Side panel for JCW Craig Hendry articleIt is therefore important that individuals plan ahead and review their arrangements regularly to ensure that they do not suffer an unexpected excess tax charge when they come to enjoy their pension savings.

As with the pension annual allowance, it is possible that the Chancellor could reduce further the lifetime allowance to e.g. £750,000. Such a move could potentially affect thousands of pension plan holders, albeit it is thought that this is unlikely.

Pension Tax Free Cash

It may also be possible that the Chancellor could reduce the percentage amount that can be withdrawn from pension funds free of income tax from the current 25%

With many pension savers having already earmarked their tax free sum to repay a mortgage, repay debt or to simply enjoy, any reduction in this could potentially throw thousands of savers retirement plans into disarray.

Salary Sacrifice

This is an arrangement between employer and employee, whereby the employee gives up part of their salary in exchange for a non-cash benefit such as an employer pension contribution or a bicycle under the cycle to work scheme. These arrangements are both tax efficient to the employee and employer and deprive the Chancellor of many millions of pounds in lost income tax and national insurance contribution receipts.

This type of scheme is considered by many commentators to be an ‘easy target’ for the Chancellor where he can easily and quickly raise funds by abolishing the tax incentives of these schemes, particularly that of a pension contribution.

As such, it is possible that changes to pension salary sacrifice schemes will be announced

Any change made could leave employer HR and payroll departments with an administrative burden as employee contracts may require re-drafting and payroll systems amended.

Opinion remains within the industry that George Osborne may have merely put his plans to reform the pension tax relief regime on hold rather than dismiss them entirely, the belief being that to expect the Chancellor to leave pension tax relief unaltered for the remainder of this parliament could be regarded as optimistic.

Craig Hendry is chartered financial planner and managing director at Johnston Carmichael Wealth


The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

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