High Earning Pension Savers Prepare for Tax Changes

November 2020
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High earners still saving for retirement may be set to lose some tax breaks when Santa Sunak becomes the Grinch as the Government seeks to balance the nation’s finances once more. 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, before the Spring Budget.

Unprecedented public spending to support jobs and services during lockdowns will have to be paid for. Previous Chancellors have highlighted £10 billion* a year pension savings tax relief for the better off as an ill targeted tax subsidy. That view is now supported by some pension providers, including the Association of British Insurers which advocates a single flat rate of tax relief for all pension savers.
 
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.

Tax breaks for pension savers now

Most UK taxpayers have an annual allowance for tax relieved pension savings of up to 100% of their earned income/ self- employed profits or £40,000, whichever is the lower, if personally funding their pension savings. Employers can pay up to the £40,000 allowance, including any personal pension savings, with no tax to pay on the employer’s contribution. 

Restrictions on higher earners pension savings, which affected those with taxable income above £110,000, were relaxed in the March Budget.  Only those with adjusted earnings (1) over £240,000 have a restricted savings allowance for pensions in 2020-21.  Every top rate taxpayer with adjusted income under £300,000 can save more with the benefit of tax relief than in earlier years. 

Higher rate taxpayers (over £50,000 income2) 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.

Inherited pension pots

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 previous owner occurs after age 75. 

An overall lifetime allowance for pension savings applies to each person. 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 plan for retirement income needs and protect family wealth.  Even without tax relief at higher income tax rates pension savings enjoy considerable tax benefits. 

With the Conservatives committed in their manifesto to no rises in VAT, income tax or national insurance the Treasury has little room for manoeuvre. Reducing the value of allowances which affect only some better off taxpayers may be a more politically acceptable way of raising revenue.

Those higher and top rate taxpayers, likely to be caught by any change to the rate of tax relief, should consider topping up their pension savings. LEBC is here to help, to explore this please call your usual adviser or contact us at clientenquiries@lebc-group.com.   

Kay Ingram  
Public Policy Director
November 2020

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.

*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 get 41% relief on income over £43,430 and 46% on income over £150,000. 
The levels, bases and reliefs from taxation are subject to individual circumstances and could be subject to change.  The Financial Conduct Authority does not regulate taxation advice

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.

Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.

This article is for information purposes only and has been compiled on our understanding of current HMRC taxation rates applying for the tax year 2020/21.

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