Higher-rate taxpayers may have breathed a rather large sigh of relief last week when George Osborne seemingly scrapped plans to tinker with tax relief. Before reaching for the confetti and party poppers, however, it is worth waiting to see just what George Osborne has up his sleeve this Wednesday.
Pensions have long been a potential target for the Chancellor, who will be looking to claw back funds to help clear Britain’s deficit. It’s not hard to see why: pension benefits cost the government over £30bn every year. Changes to the tax relief system looked to be in the offing, potentially raising ten-figure sums for the Treasury at the expense of higher-rate and additional-rate taxpayers, but vociferous opposition in some quarters – combined with the unstable nature of European politics and the global economy – led Osborne to err on the side of caution ahead of 2016/17.
It simply “wasn’t the right time” for a reform of this nature, according to one Treasury insider, and one of Osborne’s close allies insisted that the Chancellor would not put into effect anything that made savings less attractive. When the Prime Minister’s right-hand man takes to the floor in a matter of days, it is thought that there will be no mention of a removal of the tax-free lump sum, pension Isas or a flat rate of relief.
This ought to be good news for higher earners, but industry insiders are anticipating compensatory changes elsewhere. One particular area that could come under threat – and not for the first time – is allowances. The lifetime allowance that stood at £1.8m just five years ago will be reduced to a comparatively meagre £1m this year. Likewise, the annual allowance will be cut to just £40,000 – over 80% less than in 2010, when the limit stood at £255,000.
These cuts were already set out in the last Budget – but there has been speculation that the Chancellor may well attack these allowances further. Many savers erroneously believe that changes to the allowance will only affect those in the highest pay brackets. However, due to the way that annual allowance is calculated for DB schemes, as well as the lifetime allowance catching pension pots rather than contributions, means that many more could be drawn into the tax net – particularly if, as predicted in some quarters, the allowances are reduced once more next week.
With regards to the lifetime allowance, those earning over £150,000 will be subject to a new taper, the allowance falling from £40,000 to as low as £10,000 for those earning over £210,000. Some pension providers have suggested that the threshold which triggers this taper could drop as low as £100,000, potentially restricting tax relief for a significant number of savers.
Finally, salary sacrifice schemes could be another area on Osborne’s Budget radar. At present, some employers allow their workforce to pay for certain benefits – for example, gym memberships or childcare – out of their salary, with employees only paying tax after these deductions. For their part, employers don’t have to pay NI on those benefits, making such schemes mutually beneficial.
This has saved larger organisations hefty sums of money in bygone years, and with other avenues of reform now closed off, the Chancellor could zero in on salary sacrifice. One option recently mooted in the media was a National Insurance levy on the amount sacrificed – with employees potentially losing hundreds of pounds’ worth of savings.
Despite being forced to backtrack on his previous plans for PTR, most commentators believe that other areas of the pension system could be subject to change. Keep track of any developments on Wednesday via our website, where we will be covering the breaking Budget news as it happens.