Welcome to the 5th blog in the Budget 2020 count down series. Today I’ll take a quick look at potential changes to the pension regime.
But I’m confused! A number of changes have been mooted, some restricting the benefits of pensions and others improving them.
Let’s start with potential improvements, certainly for higher earners. At the moment, apart from a lifetime restriction detailing what can go into a pension pot, there’s also an annual allowance of £40,000. Pension contributions (including your employers contribution) are then included in the annual income limit of £150,000 to obtain pension tax relief and avoid a tapering annual allowance charge.
“So what” many of you might say, “it sounds complicated but generous”. I can’t disagree there, but there’s substantial evidence to say the restrictions have had a noticeable hit on doctor and consultant availability in the NHS. Why do overtime if you’re just going to pay it all in tax? One school of thought is that this can be alleviated by removing the annual allowance from the income limit calculations and giving higher earners a little more wriggle room.
On the downside, much has been made about the fact that pension relief is applied at your highest rate of tax, so higher earners get better tax relief. It costs the exchequer a lot. There’s been serious debate about either restricting all tax relief to basic rate (20%, so dragging everyone down to the lowest level) or alternatively giving everyone a level playing field by applying say a 30% relief across the board. The second option here would even-out relief for all whilst helping to encourage pensions savings: something any government is desperate to do. So that would be a positive move for basic rate taxpayers, and not necessarily the end of the world for higher rate payers.
My gut feeling is that these secondary changes may not make it into this budget. If they do, I’m sure it’s poorly thought out legislation that will have unintended consequences and we may see further changes in 2021. I’m only guessing though!
Tomorrow I’ll discuss Entrepreneurs Relief. It may turn into a bit of a rant.
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