Is Chancellor Philip Hammond planning to cut pension tax relief in the Autumn Budget?

Kyle Caldwell
8 October 2018

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.


In reply to by Oliver (not verified)

Absolutely right! This article completely fails to make this fundamental point clear! When our pension contributions go INTO our pension pot, they are NOT income! It is only when we start to take money OUT of our pension that it becomes income and should be taxed.Even calling it "Pension Tax Relief" is totally misleading - and I suspect that this language has been injected into the debate deliberately to obscure the truth of the situation. It is NOT tax relief, Furthermore, pension planning is a long-term thing. People need some stability of the rules in order to make proper and effective financial retirement plans and provision. Tinkering with pensions in this way not only undermines people's plans, it also disincentivises people to save for their retirement.Hands off our future Mr Hammond! If you need to raise taxes, do it in a fairer way, and not in these unfair, stealthy ways!

In reply to by anonymous_stub (not verified)

We shouldn't get taxed twice.Money saved into a pension should never be taxed given that we get taxed when getting paid that said pension. Or we shouldn't get taxed on pension's payments thereafter. One or the other, not twice.

In reply to by anonymous_stub (not verified)

Now that pensions are mandatory (since auto-enrolment was implemented), I would have thought that there is no need to incentivise pension contributions - tax relief could easily be phased out on those grounds. In the interim, unlike the writer of the article, I can quite see the pension tax relief becoming flat-rate, as it would be mirroring the move to flat-rate relief in other areasAs for the hole in the government finances, never mind the £20bn pa extra for the NHS, I'd worry more about rhe increasing cost of the interest on the national debt. It's been 'jam today' since about 2005, with governments ignoring fiscal prudence - what ever happened to the 'golden rule' of balancing the books over an economic cycle, with good years paying for bad years? The wasps around the jam pot will become more of a nuisance with every year that government fails to get a grip.

In reply to by G (not verified)

It is pension tax relief, in so far as we make contributions from gross income, which is the equivalent of making contributions from taxed income (like paying into other kinds of savings and investments) and then being reimbursed the tax paid upon that amount of contribution. This means that high-earning individuals could theoretically save a lot of tax by simply shovelling very large contributions into a pension. Correct me if I'm wrong, but Government identified that issue a while back and set a limit upon the amount of tax-free contributions, The logical next step in that tightening of the tax-reduction opportunity would be to reduce the amount that can be sheltered from tax (there is already a lifetime limit, for instance, which has been reduced from time to time) and/or make the available relief flat-rate.The fairest taxes are taxes upon consumption, but we still see Government shying away from widening the scope of VAT. Tax revenue has to come from people paying taxes - if we want our public services, we all must pay and (judging by the burgeoning national debt) we all need to pay more, but instead we have seen a significant number of people paying less tax in the last few years - having their cake and eating it. I'm absolutely not a socialist, but something has to give, one way or the other - greater tax or lesser service.

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