With just a few weeks until the first Autumn Budget in 30 years, the rumour mill is rumbling into action once again. Will this be the Budget that sees a curtain call for higher rate pensions tax relief? Will the Chancellor continue to shave the Lifetime Allowance (LTA)? Or will he complicate things, by adding yet another layer of Annual Allowance (AA) rules?
In this blog, we consider some of the options open to the Chancellor, the loose ends still to be tied up and some of the steps that individuals might consider in advance; in case options are restricted on 22 November.
Speaking at Barnett Waddingham’s DC Snapshot event last month, former Pensions Minister Sir Steve Webb said: "complete and utter legislative paralysis" could lead to Chancellor Philip Hammond cutting tax relief on pension contributions to say 20% (the basic rate of income tax). The ‘cost’ to a higher-rate tax-paying individual paying 10% of their £40,000 salary into a Defined Contribution (DC) scheme could be as much as £1,000 per year.
The Pensions Policy Institute estimates that cutting tax relief to 20% would initially increase the Exchequer’s net revenue by around £9 billion per year1 - making this incredibly appealing to the Government. However, such a move would hit the pockets of higher tax rate payers, one of the Conservative Party’s traditional supporter base – and would be contrary to comment from the Financial Secretary to the Treasury that he didn’t “expect to see any fundamental changes to pension tax relief in the near future” – that comment being made as recently as July 2017.
"Pre Budget Action- consider paying contributions before the Budget on 22 November. "
Nevertheless, combining the fiscal view with a more holistic savings policy might mean the Chancellor is tempted to ‘only’ cut tax relief to 25%. Such a bonus increase in tax relief for basic-rate taxpayers, might incentivise them to contribute much needed further funds to recently established auto-enrolment schemes and would still save the economy £3-4 billion per year.
This wouldn’t be a pre-Budget speculative punt, without guessing that the ever-popular 25% “tax-free lump sum” (aka the Pension Commencement Lump Sum), could be in the Chancellor’s sights. You heard it here… but, not first for sure.
In his Spring 2015 Budget, George Osborne announced that the LTA would rise in line with Consumer Prices Index (CPI) inflation from April 2018. If you think a week is a long time in politics, then two and a half years is practically an epoch. There will be questions over whether the inflation-proofing of the LTA will now happen and the Chancellor will be expected to confirm either way.
A somewhat unpopular reduction in the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000, had to be dropped from the Finance Act 2017. This was due to the lack of parliamentary time it took to consider it properly (which was a result of the ‘snap’ general election being called earlier this summer). The reduction has since been drafted into a second Finance Bill with retrospective effect – and, although there is still time for the Chancellor to pull that particular plug, he will be reluctant to incur the wrath of taxpayers who were forced to act early to avoid a large tax bill.
Another clause relegated from Finance Bill to Finance Bill, was the increase in the tax-relievable employer-funded advice allowance from £150 to £500. This could be particularly pertinent given recent ombudsman rulings (for example; in relation to a dispute between John Cherry and the Police and Crime Commissioner of South Wales). This suggests that employers should consider carefully what information they can or should pass to employees on the tax implications of decisions affecting pension benefits. At the very least, it seems they should be directing staff to seek the advice of a suitably qualified tax professional.
Finally, The Tapered AA continues to create problems for senior staff. In particular, the ‘Scheme Pays’ option to meet AA tax bills might not be readily available for individuals subject to the taper (as a scheme is only obliged to offer Scheme Pays if, among other conditions, the Standard AA of £40,000 is breached – whereas individuals affected by the taper could have a personal AA of £10,000).
So, with just a few weeks until Budget Day, now might be the time to take stock – especially if you have been considering further pension contributions in the 2017/18 tax year and may want to bring these forward before 22 November. Our AA/LTA Calculator can help you estimate your tapered AA and the amounts of tax relievable pension contributions (to DC arrangements).
Scheme administrators might also find HMRC’s recently launched Lifetime Allowance look up service a useful tool for keeping track of whether scheme members have a protected LTA.