We Predict Tax Free Cash Will Stop

We Predict Tax Free Cash Will Stop.

Pensions Minister Steve Webb has suggested that Government should introduce a flat rate for tax relief on pension contributions at 30%.

Currently, tax relief for your own personal contributions to pensions is based upon your marginal rate of tax. 

• Basic Rate Tax Payer – Relief 20%.  This means that if you pay in £80 into a personal pension, £100 is credited to your account (£20 relief)
• Higher Rate Tax Payer – Relief 40%.  This means that if you pay in £80 into a personal pension, £100 is credited to your account (£20 relief) and £20 tax refund via self-assessment, total £40 relief.
• Additional Rate Tax Payer – Relief 45%.  This means that if you pay in £80 into a personal pension, £100 is credited to your account (£20 relief) and £25 tax refund via self-assessment, total £45 relief.

For company contributions, you employer receives tax relief by offsetting pension contributions against their own corporation tax liability or if your boss is self-employed income tax.

The suggestion is to encourage more people to save by offering 30% relief because tax relief on pensions favours higher earners because they earn more, get taxed more and are therefore more likely to save in pensions to reduce tax liabilities. 

Comment

The clear message here is that Government is looking at a flat rate of tax relief.  We believe whether you offer 20% or 30% relief will make little difference to most basic rate savers.  You can either afford to make pension contributions or not. 

We suggest via the back door, this is really about taxing higher earners even more by reducing tax relief from 45%/40% to 30%.  High earners are already hit with a tax charge for exceeding the lifetime allowance (currently £1.25m) and with Mr Webb suggesting that the lifetime allowance should be removed. 

Again, we believe the Government will have “done its sums”.  Reducing higher rate relief from 45%/40% to 30% will no doubt create huge sums of additional revenue to the Treasury by saving tax relief when compared to the tax charged raised from the very low numbers of people that exceed the lifetime allowance

Tongue in Cheek View: Why we think 30% Relief is a Smokescreen

Pay £70 into a pension + £30 tax relief = £100 in your pension pot.

Immediately Retire Next Day

£25 released as a tax free lump sum

£75 released as flexible drawdown = Taxed at 20% = £15 Tax = £60 In Pocket

Result = You paid in £70 TODAY and TOMORROW you withdrew £85 – CRAZY!

Our Prediction

We suggest you watch out for pension tax relief cuts and even the withdrawal of tax free cash lump sums if we are to keep flexible drawdown retirement options.  This is a very common model operated across the globe and specifically the USA and Australia. 

You could even see different tax rates on flexible drawdown with higher taxed flexible drawdown before age 60 and lower taxed drawdown after age 60.