With Budget 2018 a couple of weeks away, rumours are swirling that Chancellor Philip Hammond will cut higher-rate pension tax relief to help fund the NHS.
Once again rumours that pension tax relief could be in the firing line are doing the rounds, ahead of Philip Hammond delivering his Budget later this month.
For some time concerns have been mounting that change to pension tax breaks and allowances, or more specifically a cut to higher-rate pension tax relief, is on the government”s radar in order to fund future spending pledges.
Even ahead of the Budget the Chancellor has a £20 billion problem on his hands, as this is the amount of additional funding the government has pledged to hand the NHS each year by 2023.
This money needs to come from somewhere, leading to speculation that this could be the year pension relief is tinkered with, given that the cost of pension tax relief to the Treasury stands at £39 billion.
Jon Greer, head of retirement policy at Quilter, says he would not be surprised to see the Chancellor knocking on the pensions door hoping to find a treat. He adds the easiest and perhaps most likely way for Hammond to fill the Treasury coffers is by lowering the pension annual allowance to £30,000 from £40,000.
A more radical move would be to introduce a flat rate of pension tax relief – an idea that has been mooted for some time. George Osborne, the former Chancellor, consulted at length on possible reforms to the tax relief on pension contributions, although he stopped short of implementing change.
If it were introduced, higher earners would be negatively impacted as the 40% tax relief for those who earn more than £46,351 a year would surely be cut, perhaps down to the basic rate level of 20%. Whatever the cut is, it will save the government money.
The Resolution Foundation, a think tank, has previously called on pension tax relief to be overhauled. In March the firm said a “flatter system” would help solve wealth inequality, arguing for pension tax relief to be set at 18% for basic-rate taxpayers and 28% for higher-rate payers, as is the case for capital gains.
Mr Greer, though, thinks a cut in the annual allowance is more realistic. He says: “The idea of fundamental reform is unlikely while Treasury desks are battling the beast of Brexit, although it is possible they will look to do it in stages.”
Such a move on annual contribution limits will mean that those saving for retirement will have the amount they can put into their pension each year capped at a lower level, or else will be hit with a higher tax charge.
One way to mitigate any future cut in the annual allowance is to make maximum use of Isas, whereby £20,000 can be sheltered tax-free every year.
Steve Webb, a former pensions minister, who is now director of policy at Royal London, agrees that a flat rate of pension tax relief being introduced “looks unlikely”. He says a reduction in the annual allowance is more feasible if the Chancellor moves to tinker with pensions.
He adds: “The potential to raise taxes through other means such as income taxes looks quite limited. The fuel duty freeze has been confirmed, while the government has previously cancelled plans to increase national insurance contributions. For all these reasons they will look at pension tax relief, as they do every year, but perhaps this year they will be looking a bit harder.
“But I do not believe we will see a flat rate of pension tax relief being introduced. It is such a big project and there will be plenty of losers. I don”t think it is something a politically weak government can introduce at this time.”
Indeed, there may not be any tinkering at all with pensions. Andy Timpson, a partner at Blick Rothenberg, the accountancy firm, points out the last thing the government will want is to disincentivise people from saving towards their retirement.
He adds: “Pensions are such an emotive topic. The Chancellor needs to be careful not to disillusion pension savers and should weigh this up when considering whether he can raise enough money to fill the void (to raise money for the NHS) by making changes to pension tax relief.”
This article first appeared on our sister website Money Observer.