The Budget 2012 - Pensions tax relief under attack? Feb '12

With the Budget less than four weeks away on March 21st, speculation is rife that pensions tax relief will be attacked. The Chancellor finds himself in an awkward spot. His Lib Dem Coalition partners are keen for tax increases for wealthier households, but his conservative instincts say the opposite. At the same time, he needs to find more money to reduce deficits and borrowing. And when it comes to pensions tax relief, Osborne does have a few, potentially lucrative, options:

1.      Scrap higher rate relief (save £3.6bn to £7bn[1])

Those paying 40% and 50% rates of tax get relief on personal pension contributions through their tax return. This is estimated to “cost” the Treasury some £3.6bn each year, just for those earning over £100,000 and as much as £7bn a year for all higher rate taxpayers. Hitting the highest earners might just appease the LibDems without costing too many heartland votes. Our verdict? Very likely to some extent.

2.      Reduce the annual allowance to £40k (save £600m)

This one’s much smaller beer. The current annual allowance of £50k of tax relieved contributions only came in a couple of years ago after much consultation and debate, but it’s definitely one of the options. And reduce the allowance to £30k and Standard Life estimate[2] it would save as much as £2bn – not such small beer after all? Our verdict? Quite likely.

3.      Tax-free lump sum (save £2.5bn[3])

The Pension Commencement Lump Sum (PCLS), as it’s now called, has been one of the best understood features of the complex UKpensions landscape. Yet it’s quite analogous. As Cooper says “While tax relief on the way in is simply a trade off for paying tax on the income you take out, the lump sum is an additional perk”.[4] This one’s a bit of a long shot and would impact everyone regardless of wealth, doing little to satisfy wider political appetites. Our verdict? Very unlikely…a general election loser.

4.      Scrap salary sacrifice arrangements (save up to £2bn in lost NICs)

Efforts could be made to close salary sacrifice arrangements although most commentators see this as a minefield. Employer pension contributions are a matter for employment contracts and are therefore considered to be beyond the remit of the Treasury and its Finance Acts. Our verdict? Very unlikely, far too complicated.

5.      Scrap NIC relief for all contributions (save up to £8bn)

This option might have the greatest potential but appears to have the least going for it in political terms. It would impact everyone and would very likely lead to much lower contributions – going against the grain of government aims for significantly greater retirement saving. Our verdict? Surely not!

Is there anything you should do?

Yes. If you’re a higher rate taxpayer and planning single lump sum contributions before the end of this tax year (April 5^th), make them before Budget Day. Any Budget changes affecting tax relief are highly likely to apply from midnight on 20^th March.

Otherwise, let’s see what Mr Osborne says. The rumour mill says pensions tax relief will change one way or another……yet again.