Pension Tax Relief and the Lifetime Allowance
I have read a number of articles in the financial press recently predicting the Government are once again reviewing the reliefs given on contributions to pension schemes. Whilst this causes a constant frustration to us and our clients, I do understand the need for the Government to reduce the reported cost of in excess of £40 billion per year.
Talk about scrapping higher rate relief entirely or the idea of a fixed rate of relief for everyone of around 25% is gaining traction. Whilst this will be relatively straightforward to manage in respect of personal pension contributions it will be interesting, if we go this route, I wonder how they will manage this for employer pension contributions?
Employer pension contributions are paid gross and therefore the individual never pays tax on the income when it is contributed (tax is paid when it is drawn later in life). If a 40% tax payer has an employer pension contribution paid on their behalf but they are only entitled to 25% tax relief will they then have a 15% tax charge to pay personally?
This led me to think about the big sums paid to defined benefit schemes to cover shortfalls, these also attract tax relief for the companies paying the sums across. Who will pay the tax shortfall on these contributions, or even pay the top up for 20% tax payers, for these contributions?
All in all it seems like a big can of worms. Personally, if something is to be done, I am more in favour of reducing the Annual Allowance further to say £30,000 per annum. But by doing this I would also support the scrapping of the Lifetime Allowance. With reduced contribution allowances the Lifetime Allowance is penalising good investment performance, I am not sure this is what the intended purpose of this piece of legislation was.
With the Budget having moved to later in the year we will have to wait for Mr Hammond to provide us with the answers, or more likely more questions.