By Neville Pereira, Lubbock Fine Wealth Management LLP
I recently attended a thought-provoking Citiwire ‘Income +’ Forum where the guest speaker was Steve Webb, the former pensions minister responsible for, among other things, the introduction of the new pension legislation.
With chancellor George Osborne set to deliver a second Budget of the year on 8 July, Webb and the influential Institute of Fiscal Studies issued fresh warnings about the tax relief proposals.
Mr Webb criticised the Conservatives' plans to restrict pension tax relief for those who earn over £150,000, going as far as branding them 'bonkers' and 'crackers'. He instead advocated a flat rate of tax relief.
Under Conservative plans outlined in their manifesto, they advised that additional rate taxpayers will only receive full relief on £10,000 of pension contributions per year rather than the £40,000 they currently enjoy.
It is anticipated that anyone with a taxable income over £150,000 pa will lose higher rate tax relief at a rate of 50p of annual allowance for every additional £1 of income over £150,000, up to a point where those earning over £210,000 will have their pension contributions restricted to just £10,000 pa gross. As it is also possible to carry forward unused relief from the previous three tax years, this may be the last opportunity to obtain 45% tax relief on potentially £190,000 of gross pension payment in the current tax year (2015/2016).
The money raised from this policy is earmarked to fund the party’s plan to end inheritance tax on homes worth up to £1 million.
While speaking at the event, Mr Webb also suggested that salary sacrifice could be scrapped to boost the tax take.
The question, therefore, that must be asked is: what form could this cut take and how difficult would it be to implement?
A salary sacrifice arrangement allows an employer and employee to make a mutually beneficial agreement on changes to the terms of the employee’s contract of employment. Usually, this means reducing the employee’s entitlement to cash pay in return for a non-cash benefit. This can be beneficial to both parties as some non-cash benefits are wholly or partially exempt from income tax and employer and employee national insurance contributions (NICs).
We clearly won’t know exactly what form these changes will take in reality until Mr Osborne delivers his Budget on Wednesday. However, if an additional rate taxpayer is going to make a pension payment they should consider doing so before the Budget.
If you would like to discuss any of these issues in more detail and see how Lubbock Fine Wealth Management could assist you, please email me or call on 020 7490 7766.