The UK’s complex tax regime was laid bare on 8 November when the Office of Tax Simplification (OTS) published a complete list of the more than 1000 tax reliefs available in the UK. Of these over 30 related to pensions.
While many of the 30 relate to specific circumstances, tax reliefs apply to all pension savers as a way of incentivising saving for retirement.
The OTS, set up by the government, is likely to remove some of the 1042 tax reliefs currently in the system but pension tax relief – although recently changed – is likely to form what John Whiting, tax director at the OTS, calls ‘a clear and highly valued benefit.’
As part of the government’s attempt to reduce the public finance deficit it announced that from 2011/12 the maximum amount that can be invested in a pension before income tax will be £50,000 a year, down from £255,000.
The lifetime allowance will also be cut from £1.8million to £1.5million from 6 April 2012. The lifetime allowance is the total value of your pension savings before a tax charge starts to apply.
However, the changes do contain some useful features such as the ability to ‘carry forward’ unused allowances. So for example, if you didn’t maximise the £50,000 for three years you could carry the remainder forward and make one larger lump sum payment.
Pension savings, through for example workplace pensions or a personal pension such as a Self Invested Personal Pension still contain valuable tax benefits. Most people will be paying less than the £50,000 limit and therefore will continue to benefit from full tax-relief on contributions.
When it announced the changes the Treasury estimated that 100,000 pension savers would be affected by the change.
With basic rate tax relief automatically applied to pension contributions, higher rate tax payers (people earning over £43,875) need to claim back their allowance from HMRC. People taxed at the 40 per cent and 50 per cent rates can claim back the additional tax – 20 or 30 per cent, within the new annual allowance.
So for example, if as a basic rate tax payer you invest £2,880 into a pension in a tax year, HMRC will contribute tax relief equivalent to 20 per cent to your pension, providing a total contribution of £3,600. For a 50% tax payer they can claim further tax relief from the revenue of 30% meaning the net cost is just £1,800.
Other advantages with a pension are that the SIPP is a tax efficient wrapper, and at retirement 25% of the fund can be taken tax free. Retirement income – after the lump sum – is liable for income tax on earnings above the personal allowance that applies.
Head of pension research at Fair Investment, George Ladds, said that for high earners or those who have been building pension funds for some time the change in lifetime allowance (LTA) may cause problems.
He said: “Any assets over £1.5 million will be subject to a tax charge. When initial changes were made to the LTA in 2006 some people where able to protect themselves if the value of their fund exceeded this limit, it is unlikely with the reduction in the limit the same protection will apply to those people who now find themselves in this position, especially as this goes back to the original lifetime allowance limit.”
© Fair Investment Company Ltd