Budget: Pension tax relief only guaranteed up to £110,000 earnings

Pensions professionals have raised a barrage of criticism to the Chancellor’s implementation of the reduction in the annual allowance for high earners, which allow for tax relief to be cut for those earning over £110,000 and not £150,000 as previously thought.

Papers published with today’s Budget confirm that employer and employee pension contributions will also be included when assessing eligibility for tax relief, meaning those earning less than £150,000 will also be affected. The new rules say salary, employer and employee contributions must be added together to assess ‘adjusted income’. Those with basic earnings of £110,000 will be entitled to full tax relief.

Experts have slammed the new rules, which create a 67.5 per cent marginal rate between £150,000 and £210,000, warning the changes, which are being introduced to fund an increase in the inheritance tax threshold, could alienate people from pension saving and threaten DB scheme contributions.

The new rules gradually reduce the annual allowance of £40,000 so that anyone earning £210,000 or more will have an allowance of just £10,000. Payments up to the lower allowance will receive full tax relief, up to 45 per cent, but contributions above this will effectively receive no tax relief. The AA is reduced by £2 for every £1 of adjusted income over £150,000.

Suffolk Life pensions technical manager Paul Evans says: “There are roughly 300,000 people earning over £150,000, who may see their pension contributions limited by a tapered annual allowance reduction in April 2016.

The tax relief cut effectively introduces a marginal tax rate of 67.5 per cent for earnings between £150,000 and £210,000, leading to as much as £13,500 of tax relief being lost. “This, in combination with the forecast decrease in lifetime allowance would be interpreted by many as a reason to stop saving as their pensions are squeezed both when contributing and when benefits are paid.

“Defined benefit members earning over the threshold, could be facing a tax bill if their accrual exceeds the reduced allowance. This would leave them facing a tax bill or a reduction in their benefits if they choose to remain in the scheme. Should they decide to leave, the funding of the scheme as a whole could be affected by the reduced contribution levels, including benefits being paid to lower earners.

“The self-employed and many other high earners are unlikely to know their final earnings until the tax year end. Planning regular contributions when the permitted allowance is unknown is impractical, leaving such clients needing to make single, large contributions once the limit is clear. Advisers should also contact the pension provider to understand how changing contribution strategy will affect plan administration and investment strategy.”

Talbot and Muir head of pensions technical Claire Trott says: “The complex way in which the Chancellor is trying to reduce the amount of tax relief on pension contributions for high earners will quite possibly have an impact on more than just those who have a reduced lifetime allowance. The added tinkering and complexity this introduces could put off saving. This is likely to be especially true regarding those with variable incomes that are difficult to ascertain until the end of the tax year. Annual allowances are allocated to pension input periods that end in a certain tax year so you could have a pension input period ending early in a tax year in which you really have no idea what your end income would be. An overall reduction for all would be a better way to reduce the level of tax relief, yes higher earners would still get more tax relief but we should forget that in order to get tax relief you have to be paying tax in the first place it isn’t just free money

“To try and counteract the issues with the pension input period they are also announcing the alignment of all pension input periods (PIPs) with tax years to make the calculations easier. All PIPs will be aligned to tax years in 2016/17. This could really be an issue for occupational schemes whose are currently aligned to their company year end.”

JLT Employee Benefits chief actuary Hugh Nolan says: “Top 1 per cent of taxpayers get 14 per cent of pensions tax relief, so the Budget removes up to £13,500 tax relief from highest earners. There will be an administration nightmare for employer and employees impacted by this.”

Retirement Advantage pensions technical director Andrew Tully says: “The provisions apply to ‘adjusted annual incomes’ which includes people’s own and their employer’s pension contributions. Or, in other words, people with basic income below £150,000 may get a lower annual pension allowance. To ensure this is focussed on high earners, people who have income below £110,000 excluding pension contributions will not be affected by a lower annual allowance. This all very complicated, even for seasoned pension techies like me, so it will be interesting to see how this all plays out practically.
“While the Conservative pre-election manifesto said they won’t propose any further changes to pension tax relief during this Parliament, a change such as this is ripe for future nibbling, gradually bringing it down and down the earnings scale. And that is before you consider the green paper on a potential pISA.’

Intelligent Pensions marketing director Andrew Pennie says: “One of the Conservative’s manifesto promises was to cut pensions higher rate tax relief for the very highest earners. Changes to the rules on IHT will be funded by restricting pensions tax relief for those earning more than £150,000.  

“Raiding pension is the wrong approach. Pensions have been through so many changes in recent years, we now need a need a period of consistency, instead of constantly chopping at the tax advantages.

 “The worry is this slicing of tax relief is merely the first step. Once this barrier has been hurdled, future governments will feel less compunction in making further hacks at tax relief, eroding it still further and further.

“It makes sense that the very highest earners take a good look at their pension savings and consider whether they want to pay any further pension contribution before April 2016 to get the full tax relief, especially if they have benefits well below £1.25m which can then be protected against the reduction to the lifetime allowance.”