But on this occasion we feel we ought to draw to your attention the risk that higher rate tax relief on pension contributions could be abolished in next weeks Budget (22nd April). See how much tax relief you could receive on your pension contributions this year. tax rate, so higher earners save more tax up front than lower earners for any given pension contribution; however, many of those who face income tax rates above the standard rate when they are working (ie pay at 40% or 45%) pay only at the standard rate (20%) in retirement; currently, The former Chancellor Sajid Javid was said to be looking at a flat rate for all – but what would this mean for pension savers, and how likely is it? The exact amount depends on your circumstances. The Treasury’s move towards a flat rate of tax relief on pensions could cost the government an extra £6bn if it is not announced in the Budget, pensions experts have warned Flat rate of tax relief could cost govt £6bn; rejected by employers - Pensions Age Magazine Speculation is rife that the rate of pension tax relief may drop to 20 per cent for everyone. It isn’t just the unpopularity of this policy that Javid would have to worry about. The Financial Times and its journalism are subject to a self-regulation regime under the FT Editorial Code of Practice: www.ft.com/editorialcode. Once you’ve submitted a tax return or contacted your local tax office, there are generally three ways in which either higher or additional-rate tax relief can be given: By altering your tax code; Receiving a tax rebate Pensions tax relief set to cost government almost £40bn This article is more than 1 year old HMRC statistics show rising cost of subsidies, with higher-rate taxpayers claiming most He said, ‘If the Chancellor doesn’t alter public sector schemes, this potential reduction in pension tax relief might only apply to private sector workers, which would be grossly unfair.’. He said, ‘If [the rate is] set below 30 per cent, higher rate tax payers expecting to pay higher rate tax in retirement might find pension saving unattractive, undermining the success of automatic enrolment.’ He added, ‘When the Government considered such changes back in 2015, it found there are many complexities to consider, and unless these are thought through and solved, changes could do more harm than good.’, Gary Smith, a Chartered Financial Planner at Tilney, again raised the issue of disparity between DC and DB pensions – which remain widespread in the public sector. Over the years we have always been loath to scaremonger ahead of Budgets. Article by Nick Green. Higher rate tax relief on pensions to be abolished? For example, switching to a flat rate of 20 per cent tax relief might force the abolition of salary sacrifice schemes. Tax relief is paid on your pension contributions at the highest rate of income tax you pay. Savings under a 25 per cent flat rate of pensions tax relief: Basic rate taxpayer aged 22 earning £27,000, Higher rate taxpayer aged 35 earning £60,000, Projected pension fund – current system of tax relief, Projected pension fund – 25% flat rate tax relief. Pensions tax relief rates could be overhauled, as the Treasury has launched a consultation to address an anomaly that penalises low earners in defined contribution (DC) schemes. If the total exceeds their annual allowance for the tax year (taking into account any unused annual allowance carried forward), they will still be able to claim higher rate and additional rate tax relief on their pension contributions, but an annual allowance charge will … Can I claim the higher-rate relief on my personal pension payments through my tax code? You'll need to do this by contacting HMRC who may ask you to complete a Self Assessment tax return form. He said: “Here, the pension benefits they receive are based on their final or career average salary and not on the amount their contributions grow to after tax relief and investment growth. No part of this publication may be reproduced or used in any form without prior permission in writing from the editor. Higher-rate taxpayers (who pay 40 per cent tax) can currently claim back an additional 20 per cent via their self-assessment, while top-rate taxpayers can claim an additional 25 per cent. So, just what does this mean to you? HMRC loses appeal against TV presenter in IR35 case, HMRC doubles down on 'light touch' IR35 promise, NHS pension tax decision a ‘wasted opportunity’ to fix system. 20%, 40% and 45% tax relief is available on contributions. But, for now, pensions tax relief is safe. This is because your gross income was originally taxed at 20 per cent. There was lots of talk before the Autumn Budget that higher rate tax relief on pensions would be abolished. This is presumably why George Osborne abandoned his plans, fearing loss of support before the EU referendum. This is a great incentive for people to save for retirement. A flat rate of 25% would benefit lower earners paying a lower rate of income tax as it would effectively top up their pension contributions. Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Basic rate taxpayers, with taxable income between £12,501 and £50,000, receive 20 per cent tax relief while higher rate taxpayers receive 40 per cent tax relief and additional rate taxpayers earning over £150,000 get 45 per cent relief. Nevertheless the writing may be on the wall for higher-rate tax relief, so those in a position to benefit from it should use it while they still can, by maximising pension contributions. Under current rules, the government tops up pension contributions in the form of tax relief, and the amount you get is equivalent to the rate of income tax you pay. Higher-rate tax relief is the extra 20% tax refund you receive in respect of your pension contributions when you submit your tax return. When you contribute to a pension, some of the money that would have gone to the government as tax gets added to your pension pot instead. Therefore it seems likely that such a change would spell the end of salary sacrifice. The 25 per cent tax free pension lump sum should be scrapped and a tax relief system more generous to lower income savers be introduced, a leading pensions analyst has argued. Mr Cameron added that even if there isn't a direct tax, national insurance exemptions for retirees could be abolished or higher-rate tax relief on contributions for pension savers could be removed. The threat of changes to pensions tax relief has been on the cards for a while but resurfaced as the government looks to recover its Covid-19 debts. Another potential hazard comes from defined benefit / final salary pension schemes. Steven Cameron, pensions director at Aegon, warns that reducing or abolishing higher-rate tax relief will deter some higher earners from pension saving. Applying flat-rate tax relief to DB schemes would therefore be complex and would place a greater burden on employers – but failing to do so would lead to accusations of unfairness from those in DC schemes. Rumour has it plans to limit pension tax relief to the basic rate of 20 per cent are … HMRC will either pay you the additional tax relief or change your tax code. However, a higher rate taxpayer who currently sees their £100 increased to £166.66 would see this reduced by £33.33. This means that the employee won’t need to provide details of pension contributions on their self-assessment tax return to get their tax relief. The local tax office will then arrange for their tax code to be changed so that higher rate relief is available throughout the year in which the contributions are being made. However, if the UK had 20 per cent flat-rate tax relief, higher earners would be able to ‘game’ the system, using salary sacrifice to lower their salaries to below the higher-rate tax threshold. For instance, if you are a basic-rate taxpayer and pay £80 into your pension, the government adds £20 to make it up to £100. “It would be good news for basic rate taxpayers who’d receive a more generous bonus but would create a big dent in the future pension pots of higher and additional rate taxpayers unless they increased their contributions.”. Higher-rate taxpayers would still have taken a small hit, but most would have found it acceptable. Will the 25% tax-free pension lump sum be abolished by the time I retire? Besides being more generous to basic rate taxpayers, this would have been easy to promote as ‘pay in two pounds, get one free’. Higher-rate taxpayers can claim 40% (41% in Scotland) pension tax relief; Additional-rate taxpayers can claim 45% (46% in Scotland) pension tax relief. However, Treasury sources have reportedly suggested decisions on tax rises could be put off until later in the year, if the economy went back in to recession. You currently receive tax relief at the highest rate of tax you pay – up to 40% for higher-rate taxpayers and as much as 45% for top-rate taxpayers. We'll reclaim all the tax relief that's due to you and add it to your pot. But the sighs of relief from the pensions community when Rishi Sunak wrapped up his speech on March 11th this year without making the change were far more audible than normal. 2020/2021. Higher rate tax relief on pension lump sums should be abolished to increase tax revenue and make pension tax relief more progressive, according to the Centre Forum thinktank. This would go some way towards reducing the government’s spending on this relief, which is currently around £35 billion a year. Higher-rate tax relief was due to be taken away from … If you operate a Net Pay Arrangement then tax relief will be given on the pension contribution via the payroll. Yes, this is possible. Pensions in general are the proverbial can of worms, and a change in just one area can have ramifications elsewhere. It will already be applied, which avoids the need to reclaim addition tax relief from H… However, the government's main motivation now is saving money, so such generosity today is unlikely. When the change was first mooted in 2015, it was suggested that tax relief might move to a single flat rate for basic, higher and top rate taxpayers. Therefore all your pension contributions are effectively increased by 25 per cent [sic] automatically (because every £80 turns into £100). George Osborne did reduce the annual allowance available to people earning more than £150,000 a year. Winners: Low earners. The government could recover a lot of tax by levying NI contributions on these payments – or simply by scrapping salary sacrifice schemes altogether (of which more in a moment). Any changes to the information given can be notified either by letter or through a self-assessment tax return at the end of the tax year. Rumours have resurfaced that the chancellor is looking to move to a 25 per cent flat rate for pensions tax relief, which could lead to higher earners significantly losing out. For example, if you’re a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80. Flat-rate pension tax relief looks set to have more comebacks than Tiger Woods. Rumours have resurfaced that pension tax relief may be about to change. It is estimated the … Under current rules, tax relief is linked to the amount of income tax paid on the full earnings before tax. “For consistency with those contributing to defined contribution schemes, higher and additional rate taxpayers in defined benefit schemes might see their and their employer’s contributions taxed as a benefit in kind, increasing their tax bills.”. There is no doubt that the Government, and it’s finances, are under huge pressure. So: Basic-rate taxpayers get 20% pension tax relief; Higher-rate taxpayers can claim 40% pension tax relief; Additional-rate taxpayers can claim 45% pension tax relief In summary, such a move would be generally unpopular. But it would prove hugely divisive for traditional Tory supporters, many of whom would end up paying for the policy directly. Losers: Higher rate taxpayers. These work in a different way from most private sector pensions, which are defined contribution. Steven Cameron, pensions director at Aegon, warns that reducing or abolishing higher-rate tax relief will deter some higher earners from pension saving. After promptings from the likes of Benneyworth, CIOT tax policy director John Whiting (now director of the Office of Tax Simplification) and Grant Thornton's head of tax Francesca Lagerberg, the new government has embraced the simple idea of restricting the annual limit for pensions relief from £255,000 to somewhere around £35,000-£40,000. This would put all taxpayers on a level playing field, able to reclaim 20 per cent of income tax on their … Not according to pensions expert Tom McPhail of independent financial adviser Hargreaves Lansdown. Analysis from Aegon, published today (November 24), found under a flat rate of 25 per cent, a basic rate taxpayer paying £100 a month into their defined contribution pension would see this topped up to £133.33 rather than the current £125, an extra £8.33. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO. Could higher rate tax relief be abolished? Could higher-rate pension tax relief be scrapped in the 2020 budget. © The Financial Times Ltd 2021 "FT", "Financial Times" and "FTAdviser" are trademarks of The Financial Times Limited and their associated companies. Such a change would have the potential to rake in much-needed billions for the Treasury to offset the costs and challenges of Brexit. Money paid into a pension is free of tax, so that 20 per cent is paid back on each contribution. Pensions Tax Opinion Budget 2020 Will Sunak axe pension tax relief? But with the Tories now commanding a large majority, and Brexit officially irreversible, the government may conclude that they will never get a better chance to push this through. A 40% taxpayer making a £40,000 pension contribution would lose out on £4,000 under a 35% flat rate, rising to £6,000 in reliefs under a 25% flat rate. There has also been a revival of the debate around the introduction of a 30 per cent flat rate of tax relief, or of turning the system on its head altogether so relief is given at the point of withdrawal rather than saving. If it happens under the next Chancellor – and it is a huge if – it would be one of the most radical Budget announcements ever made by a Conservative government. Steve Webb replies By Steve Webb for This Is Money 08:51 22 May 2017, updated 09:05 23 May 2017 We can’t recall a recent Budget when there weren’t widespread concerns about the prospect of higher-rate tax relief on pension contributions being abolished. Moving to a flat rate of pension tax relief between basic and higher Income Tax rates could offer a significant cost saving for the Treasury, depending on the level at which the rate was set. There had been considerable speculation in the run up to the Budget that the government could radically change tax relief on pensions, introducing a new flat rate for all savers. Given how much work and complexity would be involved in such a change, it seems unlikely that this government will have workable plans ready to role in time for the 2020 Budget on 11 March. If you want to offer your employees tax relief on their pensions, you can choose either a Net Pay Arrangement or a Relief at Source method of deduction into an employee’s pension. How contributions would be increased if government moves to 25 per cent flat rate: Under a 25 per cent flat rate, a basic rate taxpayer on average earnings of £27,000, paying 4 per cent of take home pay from age 22 through to their state pension age (68), could see their pot increase from £319,000  to £340,000. Some ideas just won’t die. One recommendation – likely to have proven very popular – was that it should be set at 33 per cent. When you pay money into a pension, the amount is immediately boosted by tax relief. You can claim additional tax relief on your Self Assessment tax return for money you put into a private pension of: 1% up to the amount of any income … Rumours have resurfaced that the chancellor is looking to move to a 25 per cent flat rate for pensions tax relief which could lead to higher earners significantly losing out Mr Cameron added that before moving to a flat rate system, the government would have to figure out how it would work for defined benefit schemes. It … Continued Steven Cameron, pensions director at Aegon, said the proposed flat rate was seen by many as a "fairer way of sharing this government incentive across people of all earnings bands but would also likely produce a cost saving for the Treasury. It comes on top of the 20% basic-rate tax refund the taxman pays directly into your pension plan. On MSN articles keep cropping up where they talk about the government stopping higher rate relief - and if that happens you can bet the company contributions "loophole" for our "service companies" would be closed within a year afterwards. It is this extra tax relief that may be up for review, either in the upcoming Budget or at some later date. There were whispers that before his resignation, Chancellor Sajid Javid was looking at reforming the UK’s system of pension tax relief, a plan favoured by George Osborne back in 2016 before the then-Chancellor ditched it. By this method they could save similar amounts of tax, and the Treasury would fail to increase its tax takings. Earlier this year (February 10) former chancellor Sajid Javd was eyeing cutting high earner’s relief to 20 per cent.