The government has hinted they are introducing changes to the tax relief on pensions, with the full details likely to be announced on 16th March – Budget Day, this year.
Currently when someone pays into a personal pension they receive tax relief based on the income tax they pay.
This means:
- If you are a basic rate taxpayer (with a top rate of 20% income tax) then paying £80 into a pension means the government will add an extra £20 to make the contribution up to £100.
- If you are a higher rate taxpayer (with a top rate of 40% income tax) then paying £80 into your pension means the government will still add an extra £20 from the government, However you will also receive an extra £20 via a tax refund rather than into your pension fund, which gives you an effective rate of 40% income tax relief.
The potential change is likely to introduce a ‘flat rate’ of pension tax relief which may be between 25% or 33%.
Let’s take a look at what this will mean if we assume a flat rate tax relief of 33%.
- If you are a basic rate taxpayer, then paying £80 into a pension means the extra £20 to make the contribution up to £100 but you may also get an extra £13, which could be paid via a tax refund. The basic rate taxpayer could be better off.
- If you are a higher rate taxpayer, then paying £80 into your pension you will also get an extra £20 from the government and also receive an extra £13 via a tax refund (rather than into your pension fund). This gives you an effective rate of 33% income tax relief, so clearly you would be worse off than the current system.
Of course we do not know if the changes will be introduced this year or what the new rules could be. However if the current system of pension tax relief is more beneficial to you than the proposed new system Platinum would encourage you to make a pension contribution before 16th March this year.
If you have any questions please let us know.