Further threats of pension tax changes.

Just a few weeks after the government seemed to rule out any fundamental changes to pensions taxation, prominent speculation has once again appeared suggesting the opposite.  In the current climate, with need for the Government to generate additional tax revenue from somewhere, it appears that rumours of a tax raid on pensions aren’t going to go away anytime soon and advisers must live with the constant uncertainty.

Clearly this is not ideal and goes along way to undermine consumer confidence in pension planning generally, even for those who may never be impacted by any tax changes.

The current rumours focus on the introduction of a flat rate of tax relief, an introduction of some form of tax on employer contributions and a further reduction in the Lifetime Allowance (LTA).

The first one we have seen many times before and has so far failed to be implemented, not least because there are a number of complications of doing so.  The possible introduction of an employer tax on contributions could be being considered to try and overcome some of these issues, for example, it could prevent someone simply using salary sacrifice to get around and reduction in personal tax relief. 

In terms of planning the message remains the same.  Higher and additional rate tax payers who have sufficient funds and allowances should consider maximising their pension contributions while the relief remains.  For them, changes to rates are only likely to produce a worse outcome.

The same applies to small limited companies.   The tax benefits or extracting profits via an employer pension contribution can be significant and again subject to available allowances and affordability making the best use of this planning while it is still available seems the best option.

The change that may cause client’s the most immediate concern is another reduction in the Lifetime Allowance.  Unfortunately, this seems to be the most credible immediate potential change, not least because it is by far the easiest to implement. 

The announcement of a freeze in the LTA at £1,073,100 until 2025/26 shows the LTA is clearly at the forefront of Government thinking.  The change seemed a little odd, given it will have a significant impact on senior NHS staff, the same group or people the Government were very keen to appease just last year with a significant increase in the tapering limits.  On the 24 June 2021 the British Medical Association published analysis highlighting the fact that the number of doctors retiring early had tripled since 2008 and sighted changes to the LTA as a significant factor. They also noted that a large proportion of doctors are considering retiring even earlier as a result of the recent freeze.  As with tapering, the response by key NHS workers is likely to be the best defence tax payers as a whole have against further reductions in the LTA.

Those who have already built up significant funds or benefits should take some comfort in fact that whenever the LTA has reduced in the past, protection has been available for those to protect their LTA at the current levels. 

Any further reduction in the LTA will mean that many who exceed it will still be basic rate taxpayers when they take benefits, something that would have been highly unlikely when the LTA and the LTA charge were introduced.  There is some small comfort in this in that if higher rate relief is received on contributions, as long as the income option is selected for any LTA excess, the overall effect for a basic rate tax payer in retirement is broadly neutral.  With the pension also offering tax efficient investments, inheritance tax advantage, potential employer/employer matching contributions and national insurance savings, there could still be benefits in continuing contributions for many even where the LTA may be exceeded.

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