No Immediate Change to Pensions Tax Relief
The Treasury has rejected any immediate changes to pensions tax relief, despite MP recommendations for an urgent reform.
Last week’s response from The Treasury to the Treasury Select Committee’s tax after Coronavirus inquiry published in March said there was “no clear consensus for reform” following a 2015 consultation. It said that “more radical changes to pensions tax relief would require careful consideration” and that a number of changes had already been made in recent years to ensure tax relief was “fairly distributed” including the increased tapered annual allowance thresholds.
March’s Treasury Select Committee report recommended a review of pensions tax relief when considering the differing tax burdens between employed, self-employed, and limited company directors.
Financial secretary Jesse Norman said any changes to pension tax relief did not meet the government’s priority to support businesses and workers to recover from the economic impact of the pandemic.
He said: “While the government appreciates the committee's detailed analysis and engagement on tax policy, I note that the balance of recommendations in the report leans away from measures that would help to repair the public finances in the coming years.”
McCrea Financial Services independent financial planner, Chris Bain highlighted “An overhaul of the pension tax system has been spoken about for years now and this decision will give a degree of certainty going forward. The knock-on effects of changes to the tax rules can be far reaching and have unintended consequences so it is pleasing to note that careful consideration is being given to this important topic”.
IPP provider Curtis Banks said the Treasury's response could indicate that rather than a single sweeping change, we could see further small tweaks and adjustments to the existing rules over the coming years.
Jessica List, pensions technical manager at Curtis Banks, said: "While frequent small changes can be frustrating for savers and advisers and add complexity to the rules, they may be less disruptive than a full overhaul of the rules. It’s reassuring at least to see acknowledgement that significant changes would need to be considered extremely carefully to avoid unforeseen adverse effects."
Tom Selby, senior analyst at AJ Bell, said the government is right to tread carefully and warned of the "profound consequences" should radical changes such as scrapping higher-rate pension tax relief happen.
He said: "If the Government were to opt for a flat rate of pension tax relief set at 20%, policymakers would need to figure out how to apply this single rate of pension tax relief to defined benefit schemes - including those of the NHS and the wider public sector.
"This would inevitably lead to NHS staff and others facing shock tax bills as a result – a tough sell at the best of times, let alone after one of the most brutal years health workers have ever experienced.
"It would also have significant implications for retirement saving more broadly. At a time when automatic enrolment is sowing the seeds of a pensions recovery in the UK, attacking pension tax relief would be a retrograde step."
Pensions specialist and director at McCrea Financial Services Jonathan Campbell sums up the position following this latest review; “It seems that each budget there are rumours that the government are going to make changes to this area. It is a real challenge for them and needs a great deal of consideration. In the meantime, pensions remain a hugely tax efficient way of saving for retirement and I would encourage any high earners to take advantage of the significant tax benefit whilst it remains available. However, it is a complex area and advice is vital to ensure that you make the most of your options and don’t fall foul of any traps such as the tapered annual allowance”.
For help with your tax planning, pensions and investments contact us today for a no-obligation and free of charge initial chat.