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Chartered Insurance Institute
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I can see into the future...

It’s that time of the year again where the ‘crystal balls’ are hard at work. The next Budget is in sight and the rumours of culling higher rate tax relief are high on the prediction list. Not to be accused of predicting the same changes as last Budget(s), this time we are hearing that it may just be older people that will see the cut in tax relief with younger people possibly reaping the benefits.  Makes a change from hearing about PCLS losing its tax free status.

Practically, changing tax relief is a huge challenge. Flat rate relief or the removal of up front relief will replace the current system with another level of complexity unless tax relief is abolished all together. This suggestion is not as radical as it sounds – indeed there is evidence that tax relief does little to encourage savers as evidenced abroad.  Consultation with the industry is key if any change is to be properly workable. 

One of the biggest issues with any change to personal tax relief on pensions is the interaction with employer contributions. Although it would appear that some of the suggestions appear to just ignore employer contributions as if they are a completely different issue.  Employer contributions are exceptionally costly to the Exchequer and any change needs to absolutely include a review of  their impact. A tax relief cap on personal contributions will surely encourage an employer to change  contracts of employment to include a non-contributory pension scheme with a lower salary. Would an employer offer this alternative to all categories of staff – maybe those that need to save the most for an adequate retirement will be the category that isn’t included. Employer contributions to pensions form part of an overall remuneration package and as it isn’t taxed as salary it is effectively a tax free payment to the individual, which means that the payment gets full marginal rate tax relief. Not to mention that employer pension contributions aren’t subject to national insurance.

A change to tax relief may have a knock on effect to salary sacrifice arrangements – but we know that there has already been a review of salary sacrifice arrangements in general and pension contributions were purposefully left out of the consultation -so deemed ‘safe’. 

For what its worth, my crystal ball is suggesting a tweak to the Annual Allowance and I can see…. in the distance…. a possible change to the threshold income level in the tapered annual allowance calculation.  My disclaimer…Crystal balls should not be relied upon and past performance is not an indicator of the future!