How will the 30 October Budget Announcement Impact Pensions?

Rachel Reeves has certainly indicated that she may have to raise taxes in her 30 October Budget Announcement. A restriction in pension tax relief looms large, especially as there may be plans to extend auto-enrolment to 18-year-olds and to remove the starting earnings threshold for this, which will only increase the overall tax relief bill for the Treasury.

From time immemorial, tax relief has been given on pension contributions at an individual’s highest marginal rate of Income Tax. That is, at least 20% relief for all, with 40% available for those with taxable income between and as much as 60% for those in between (due to the tapering away of the tax-free personal allowance).

Switching instead to the same flat rate for all will, if set at the right level, begin to save the Treasury money. Past academic studies have put the pivotal flat rate at 30%. So, it will need to be, say, 25% or just 20% basic rate if serious and immediate savings are to be made.

What is the impact?

There’s potentially a quite significant impact both financially for individuals and administratively for employers and pension providers.

Currently for a gross pension contribution of £10,000, a basic (20%) rate taxpayer would receive 20% tax relief worth £2,000; a higher (40%) rate taxpayer £4,000, etc. See table below.

If a flat rate of, say, 25% is introduced the basic rate taxpayer will be better off to the tune of £500 but very much at the expense of those paying higher rates of Income Tax.

(Scottish rates are not covered here, but as headline rates range from 19% to 48%, the impact on Scottish taxpayers would be even more pronounced.)

Table: Tax relief on a £10,000 gross pension contribution at different marginal rates of tax versus a hypothetical flat rate of relief at 25%

Basic 20%

Higher (40%)

Additional 40%

“60%”

How might relief be administered?

The existing ‘relief at source’  facility might be adapted. Currently, ’relief at source’ provides 20% basic rate tax relief for individual direct contributions – that is, paying £8,000 net is grossed up within the plan to £10,000. Higher, additional and ‘60%’ taxpayers collect the extra £2,000, £2,500 or £4,000 tax relief via their tax return or a tax code adjustment.

For a flat rate of, say, 25%, a net contribution of £7,500 would gross up to £10,000, a £500 saving for the basic rate taxpayer. However, the higher taxpayers would no longer be able claim further relief.

An employee is generally not currently taxed on an employer contribution of £10,000, and so tax is saved of up to 60%. With a flat rate system, the employer contribution could be taxed at source via PAYE and the net amount (£8,000, £6,000, £5,500 or £4,000, ignoring any potential NIC changes) paid over to the pension company to be grossed up to £10,667, £8,000, £7,333 or £5,333 respectively.

What other methods of reducing relief could be considered?

While the most talked about model is fixing the rate of tax relief, other models have been considered academically in the past, including moving to no relief on contributions at all (but benefits, possibly including growth, would be tax free), reducing the annual allowance, and re-instating/reducing the lifetime allowance (although Labour let it be known ahead of the General Election that it does not intend to do so).

Another ‘at retirement’ method of increasing Treasury income would be to reduce tax-free cash from 25% to, say, 20%.

When will we know?

The Budget on 30 October 2024 would be an obvious date to announce a change.

 When will it happen?

Traditionally, tax changes are often effective at the start of the tax year so 6 April 2025 is a possibility. We would hope that the Government would avoid punitive anti-forestalling measures and allow taxpayers the remainder of the 2024/25 tax year to consider accelerating contributions within current tax-effective limits, but we should not rule this out.

An extended date of, say, 6 April 2026 would give employers, payroll and pension providers adequate time to adopt their systems and procedures.

What should I consider?

The obvious thing for employers and members to consider from a tax perspective is making additional pension contributions before 30 October 2024, while full rate tax relief is definitely still available, although basic rate taxpayers may clearly decide to do the opposite.

Of course, total contributions need to be capped at an individual’s available annual allowance, if an excess tax charge is not to cancel out the fast-tracked tax relief you hoped to get in the first place.

Please note that while Blick Rothenberg can help you estimate your available annual allowance for the current tax year, we do not provide investment advice, and you should take account of all your personal circumstances and consider advice from an independent financial advisor before making any decisions.

Meanwhile, employers can start to think about the actions they will need to make in the event of any changes announced in the Autumn Budget. These include:

• Employee communications
• Revisions to benefits policies
• Working with payrolls and vendors to implement changes

Would you like to know more?

If you have any questions about the above, please get in touch with your usual Blick Rothenberg contact or with our pensions team using the form below.