Plans to alter the tax-relief given to people who make pension contributions have been shelved.
Over the past few weeks, speculation has been mounting that George Osborne was planning a radical overhaul to the existing system of pension tax-relief, causing concern amongst many investors, all that now seems to have changed.
How does pension tax-relief work?
Currently, for every £80 paid into a pension, the Government adds an additional £20 through tax-relief. Higher rate taxpayers can claim back an extra £20, taking the net cost of a £100 contribution to just £60.
However, the system costs the Treasury over £20 billion each year, with the majority of that benefit going to higher rate taxpayers.
In his last Autumn Statement, the Chancellor announced a review of pension tax-relief, suggesting that the system could be changed to mirror ISAs (Individual Savings Accounts), with no tax-relief on contributions, but tax free withdrawals in retirement.
It had been thought that the Pension ISA was Mr Osborne’s preferred option, as it would have delivered a significant saving. However, doubts had been raised by many people, concerned about the ‘black hole’ it would have left in the Government’s tax receipts in years to come, added complexity and that it would discourage pension saving, at a time when millions have been automatically enrolled into workplace pensions.
A second option being considered was a move to a system of flat-rate tax-relief set at between 25% and 30%, which would have benefited basic rate taxpayers, and was considered progressive by many.
No change to pension tax-relief
All that now seems to have changed.
In the face of mounting criticism Government sources have now briefed that there will be no changed to the current system of tax relief in the next Budget, due on 16th March, as “now is not the right time.”
The move was welcomed by many who were against the introduction of a Pension ISA. However, other pension experts criticised the Chancellor for not implementing a flat rate of tax-relief, which could have benefited many poorer pension savers.
However, although no changes to tax-relief are now expected, it is still possible that Mr Osborne could decide to change the Annual Allowance or the Lifetime Allowance, which govern the maximum annual pension contribution and the cap on how much you can hold in your pension before incurring punitive tax charges.
We await the Budget with baited breath and will of course report any changes to your pension soon after Mr Osborne’s speech.
In the meantime, should you like to talk to one of our advisers about your pension please call Bev or Sarah on 0115 933 8433 or email email@example.com we will be happy to help.