What is pension tax relief?
When we are advising clients on their pension options, we often need to explain pension tax relief. Tax relief is the biggest advantage that pensions have over ordinary investments. This is an incentive set by the government to encourage you to pay into your pension pot. When you pay money into a pension, the government refunds the tax that you paid on this this part of your income meaning the amount is immediately boosted by tax relief. Usually you don’t need to worry about this. Your pension provider will claim it as tax relief on your behalf and add it to your pension pot. You get relief at source in all personal and stakeholder pensions, and some workplace pensions.
What are the current rates?
As it stands, when you pay into a pension, you receive tax relief at the highest rate you pay income tax. Basic rate taxpayers receive 20% pension tax relief and higher rate taxpayers 40%. So if you are a basic rate tax payer you only need to pay £80 to save £100. Higher rate tax payers only need to pay £60 to save £100.
What are the potential changes to pension tax relief?
However, many people within the financial services industry
are speculating that the budget on 11 March may see reforms in this area. There is a suggestion that we may see changes for higher rate tax payers, with a reduction in the tax relief rate from 40% to 20% tax relief. If this is the case, higher rate tax payers would do well to make any pension deposits before the budget. There is unlikely to be any change for basic rate tax payers.
Of course, this is likely to be a highly unpopular move. The Chancellor may decide not to make this change at this time. However, it is a significant change that has been discussed for several years. If it does not happen in this budget, it is still likely to happen in the foreseeable future.
If you are a higher rate tax payer and would like to talk to us about the most efficient way to save for your future, please get in touch and arrange a meeting
with one of our independent financial advisers.
What other pension changes may be announced?
We might also see an announcement in the budget about pensions dashboards. This would help people keep track of their retirement savings by displaying all of their pension pots, including the state pension, in one place online. This has been promised in previous budgets, but the December Queen’s Speech announced the Pensions Schemes Bill which should include this change.