Tax relief on pensions for high earners

As the industry expected, the latest Budget presented plans to limit tax relief on pensions  for high earners but fortunately, the changes were not as far-reaching as had been feared, initially at least.

The main change will only affect those with earnings over £150,000. At present, any individual with sufficient UK earnings is entitled to receive tax relief on contributions up to £40,000 per tax year (the Annual Allowance). This figure of £40,000 per annum is to remain as the maximum contribution level per tax year for individuals for the foreseeable future.

From April 2016, the Annual Allowance will be gradually reduced at a rate of £1 for every £2 earned over £150,000, until the Annual Allowance is reduced to the minimum level of £10,000. There may be potential for business owners to plan carefully how they take ‘income’ from the business in order to maximise the sums that they can contribute to a pension plan, whilst benefitting from tax relief.

The Lifetime Allowance, the amount that can be saved in to a pension, without adverse tax consequences is to be reduced from £1.25m to £1m from 6 April 2016. The Lifetime Allowance will remain at this level until 2018, at which point it will begin to rise with the increase in the Consumer Prices Index, on an annual basis.

Individuals who have pension funds above £1m will be able to apply for a new form of transitional protection, designed to ensure that those with pension funds above this level are not adversely affected by the new rules.

Perhaps the most notable point to be made in the Budget related to a Green Paper which the Government unveiled relating to the current system of tax relief applicable to pensions. The current system provides tax relief for contributions, a tax efficient environment for funds to grow in, but then subjects funds to tax on the way out. The Government is considering changing this approach, potentially providing no tax relief on the contributions, but then allowing income to be paid from the pension funds with no Income Tax to be paid. The industry is confident that there will be wider reforms, although we must wait and see exactly what these are.

If you wish to discuss how these changes might affect you, please do not hesitate to contact us.