Budget Squeeze For Higher Earners? 

June 2020
Employees, Engineers
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The Budget of 11 March preceded the Coronavirus lockdown, and much has changed since then. Annual government borrowing was set at £55 billion and as a precaution Chancellor Rishi Sunak earmarked an extra £20 billion to deal with the Coronavirus outbreak.*Within weeks Government borrowing spiralled and leaked Treasury estimates of £337 billion required to fund the emergency measures may yet be exceeded, as costs balloon and tax receipts shrink. 

In response, the Government announced a Mini Budget which was held on the 8th July, however this continued to focus on protecting, supporting and creating jobs. A harder day lies ahead for the Chancellor as he grapples with the question of how these rescue packages will all be paid for. This is likely to be addressed in the scheduled Budget in November, meaning that some giveaways, only announced in March, may have a short shelf life as the Government struggles to balance the nation’s books amidst the slowdown in economic activity. 

It is my opinion that chief amongst the targets for tax rises will be the tax relief granted on pension savings to higher and top rate taxpayers I will be delighted to be proved wrong but would suggest anyone still building up their retirement savings, who pays tax at 40% or 45% (41% or 46% if resident in Scotland) consider prioritising pension savings this year, sooner rather than later. 

Tax breaks for pension savers
Higher rate taxpayers (over £50,000 income1) get a taxpayer subsidy of £4 for every £10 saved out of income taxed at the higher rate and a top rate taxpayer (over £150,000 income) £4.50 for every £10 saved out of income taxed at the top rate.  Basic rate and non-taxpayers get relief at £2 for every £10 saved. Pension funds incur no income tax or capital gains tax while invested. Up to 25% of the fund may be withdrawn tax free after age 55, the balance being subject to income tax at the rate payable when withdrawn.

Those with pension pots invested at date of death can pass them on to others, usually outside of the taxable estate for inheritance tax. There is no tax to pay thereafter where death occurs before age 75, but income tax at the recipient’s rate is levied when funds are withdrawn where death of the original owner or most recent beneficiary occurs after age 75. 

March Budget Giveaway
Following the March Budget, many higher and top rate taxpayers will be able to save more in pensions tax-efficiently in 2020-21. Those with income(1)between £110,000 and £300,000 saw restrictions on pension savings allowances lifted substantially. Those with adjusted income up to £240,000 can now save up to £40,000 a year and a gradually tapered amount, where adjusted income exceeds this. But a flat allowance of £4,000 applies where adjusted income(2)reaches £312,000 or more.

To keep the cost of pension tax relief affordable to the taxpayer an overall lifetime allowance for pension savings applies to each individual. From 6 April 2020 this is £1,073,100. Where cumulative pension funds withdrawn, held at age 75 or on earlier death exceed this, a tax charge applies to the excess. 25% if the excess is used for annuity purchase or placed in drawdown (even if no income is taken) and 55% if drawn as a lump sum.
 
These tax breaks make pensions one of the most efficient ways to accumulate family wealth and plan for retirement income needs. The Treasury estimate the annual cost of tax relief on pension savings is £35.4 billion. * While the bulk goes to employers who are funding defined benefit pensions, the next largest slice is paid to individual savers, who are 40% or 45% taxpayers. Over the last few years successive Chancellors have considered a redistribution of this tax relief away from higher earners. This would be consistent with other personal tax allowances such as savings interest, marriage allowance, and tax-free child benefit, all of which are reduced or removed for higher rate and top rate taxpayers.
 
On 27 May the Prime Minister reconfirmed his desire to stick to his Manifesto pledges of no rise in income tax, VAT or national insurance. This leaves little room for the Treasury to manoeuvre and changing allowances which affect only some better off taxpayers may be seen as the more  politically acceptable and less obvious way of raising revenue.
 
Kay Ingram  
Director of Public Policy 
June 2020

*Red Book HM Treasury 11 March 2020

(1). Income is defined as all gross taxable income plus employer pension contributions.

(2). England, Wales and Northern Ireland. Taxpayers resident in Scotland pay higher rate tax on earned income above £43,430 with 41% tax relief and top rate on income above £150,000 with 46% tax relief.

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

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