Is the Future of Pension Tax Relief Safe?

The recently announced 1.25% rise in dividend tax and National Insurance is intended to cover health and social care, but critics have suggested that the new measures don’t go far enough.

9th December

There has been a great deal of speculation, particularly over the last 18 months, around potential increases to the tax landscape. Capital gains tax and Inheritance Tax have both been marked as ready for an overhaul. Discussions of a ‘wealth tax’ have also been on the table.

Another option to increase tax revenues would be to change the structure of pension tax relief. Pensions have changed significantly in the last 20 years, with Pensions Simplification (2006) and Pension Freedoms (2015) being the most notable milestones.

But any legislation will need to strike a careful balance between increasing tax inflows while still encouraging people to save for their retirement.

How Does Pension Tax Relief Work?
Currently, the following tax benefits apply to your pension:

What Are the Limitations?
The tax relief on pensions is generous, but it is not unlimited. The following restrictions apply.

While higher earners can benefit the most from pension tax relief, they also face the highest penalties for overfunding. Advice is recommended, particularly if your situation is complex.

How Could Relief be Reduced?
At the moment, there are no concrete plans to reduce pension tax relief. If this does go ahead, any of the following would be possible:

It’s important that any new measures do not discourage the average working person from contributing to their pension. The majority of people will be reliant on their pension to provide a retirement income and will not have other wealth to fall back on.

The likelihood is that any measures that do come into play will target higher earners or those with already large pension pots.

Taxing pensions more heavily may not directly increase tax revenues, as many people will simply opt to reduce their contributions. However, it could lead to more money circulating in the economy.

Other Options to Reduce Tax
Of course, if pension tax relief is reduced, there are a few other ways in which you can keep your tax bill under control. For example:

Should You Still Contribute to a Pension?
Any reductions are likely to take the form of tweaks to the existing rules rather than a sweeping overhaul. It would be foolish to introduce legislation that discourages the population en masse to contribute to their pensions, as that means storing up a crisis for the future. The main target of any new rules will probably be the people (or organisations) who can afford to take good tax advice and reduce their liability through other means.

It’s important to note that any reductions to pension tax relief are purely speculative at this point. You shouldn’t reduce your pension contributions, and in fact, most people could benefit from increasing them further.

Please do not hesitate to contact a member of the team to find out more about your investment and retirement options.

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