Adjustments to pension contributions could create a fundamental lack of trust in the system

With the Government facing significant budgetary pressures pensions tax relief could again be a target for HM Treasury, as it looks to raise billions in additional tax, say leading tax and advisory firm Blick Rothenberg

Robert Salter a director and client tax specialist at the firm said: “The Government have

have ruled out increasing CGT, leaving the option to break the triple lock.  They don’t want to touch income tax/NIC/VAT which means considering a freeze on the state pension.”

He added: “They have several options is changing pension tax relief rules or pension taxation – restricting higher rate relief or possibly applying NIC to pension income.

Whichever options the Government chooses in this regard, will come with significant political and tax issues.”

Robert said: “if the Government looks at restricting the amount of tax relief which is provided to employees and workers – either on an annual basis or from a lifetime allowance perspective – it could easily discourage pensions savings and / or act as an incentive for highly skilled employees to stop saving for their retirement, retiring early or to look, for example, at emigrating to avoid punitive tax levels.  In this regard, for example, there has been a suggestion that NHS doctors have been retiring early or emigrating overseas in part because of the punitive tax levels which can arise for ‘excessive pension contributions.”

He added: “under the present system everyone has a potential tax liability of 55% on any pensions above the £1.073m lifetime allowance value.  Reducing the value of the lifetime allowance even further – say to as low as £800,000 as has been suggested – would simply act as a further disincentive for pensions saving. Such a move would also be particular punitive for people in the private sector, who overwhelmingly have money purchase pension schemes, and who are already suffering from an extended, ongoing period of historically pension annuity rates.”

Robert said: “Other options available to the Government, if it is serious about trying to raise money from pension contributions would be to:

• Have employer pension contributions become liable to employer NICs; or
• Change the whole nature of pensions tax relief, so that employee and employer contributions are taxed, but the subsequent pension income is ‘tax free’ when received. “

He added: “These ideas would be innately unpopular but could help raise significant amounts of additional Revenue for the Government.  For example, providing tax relief for employee and employer contributions based on when the contributions are made, costs the Government approximate £21bn per year in tax relief.  Transferring the point at which tax relief is provided to when the pension is received would therefore help eliminate this immediate cost to the Revenue though.”

Robert said: “it would be complex to administer such a fundamental change to the pension system and there could quite possibly also be significant falls in the amounts which people pay into private pensions, at a time when the Government is keen to encourage additional private pension provision.”

He added: “Though the Government has presently put itself into a very tight corner – with certain tax rate ideas (e.g. increasing NIC or income tax rates) – officially not on the table because of the 2019 Conservative Party manifesto pledge, the reality is that further adjustments to UK pension contributions could further undermine the whole basis of private pension provision in the UK and create a fundamental lack of trust in the pension system and the idea of one legitimately receiving Government support to plan for one’s eventual retirement.”