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In July 2015, the Chancellor announced plans to ‘revolutionise’ the pension tax relief system, publishing a green paper and starting an industry-wide consultation on its very future. With nearly £50bn being paid out in pension tax relief each year you can see why such ‘low hanging fruit’ is appealing to Mr Osborne in his drive to reduce the deficit.
That consultation process finished in September 2015, and whilst an announcement on the outcome was expected in the autumn statement, it did not come as a great surprise that, given the potential consequences, the outcome was pushed back to the March 2016 Budget.
This is now fast upon us and the industry finds itself still in the dark about what the outcome might be. There has been great debate over the past few months and we are now starting to see little nuggets of ‘what might be’ hit the front pages of the financial press. Call me cynical, but this could be a case of dampening down the impending news that will be delivered in the budget.
Whist we do not have a crystal ball, one thing is for certain; changes are coming and it is important you have an idea what this could mean - so here are my thoughts:
So, what for Salary Sacrifice? If we believe the hype, the net is starting to close in on Salary Sacrifice, the system that allows savers to contractually give up salary in lieu of benefits paid for by the employer and in turn generating tax savings. The Government has long kept a keen eye on Salary Sacrifice with the feeling being that at some point the loophole would be closed to cut back on the tax relief it provides.
Some believe that Salary Sacrifice will go entirely, but there is a school of thought that believes that it may be removed for employees only (subsidised by an increase in basic rate tax relief) with employers keeping their entitlement to employer NIC relief. I believe that removing Salary Sacrifice tax relief for employers would be detrimental to the ongoing funding of employee benefit programmes if this loophole were to be closed and the ability to subsidise costs was taken away.
The current tax relief system pays relief up to an individual’s highest marginal rate of income tax. This means that higher and additional rate taxpayers (40% and 45% respectively) currently receive double the relief available to their basic tax paying counterparts (20%). The criticism of this system is that it unfairly benefits those with higher incomes with the highest earners receiving the lion’s share of the relief (even if they do pay more in income tax).
Complete the form to download the full whitepaper and find out what changes you can expect and the further impact the March 2016 budget could have on your pension scheme.