We are indebted to Richard Dyson of The Daily Telegraph for this news on pensions. Though we stress that it’s a forecast and not an absolute certainty.
And at the same time, we need to remind you that we are not authorised to provide pensions advice, but we can tell you about tax law and possible changes to it. If we are to believe everything which we read in the Press, which we hear in Accounting Bulletins and which we learn on our CPD courses, then the March 2016 Budget is going to squeeze middle Britain like never before.
George Osborne has already announced that new punitive tax rates will be applied to dividend income from 6 April 2016 and that buy to let landlords will be hit with restrictions on tax relief. Now, it seems that higher rate taxpayers who have private pensions will also be hit.
If you’re a higher rate tax payer investing in pensions, and you’re used to getting 40% (or 45%) tax relief on pensions, then you may be shocked to see that tax relief reduced to 20%. Let’s assume you’re a 40% taxpayer. Up to now, for every £1,000 you added to your private pension, you gained an instant 20% boost as The Exchequer would add £250 to your pension pot, and your pension provider would then have £1,250 to invest on your behalf. Then, a few months down the road, you do your Self Assessment Tax Return, you get back (in your hand effectively) another 20% (being another £250), because your tax bill is reduced by that amount.
That means that your pension provider has a pot of £1,250 which cost you £750 of your money. That’s how 40% tax relief works.
Now if, as seems likely, the Chancellor changes the rules on 16 March 2016 then you may find that your tax relief is restricted to 20% and thus your pension provider will have a pot of £1,250 which in future costs you £1,000 of your money.
Richard Dyson of the Telegraph suggests you pour your money into pensions now, before this forecasted measure is introduced. Our view is that, if you were going to be investing in your pension anyway, in 2016/17 and later years, then you could potentially get more tax relief by bringing forward that investment and doing it in 2015/16 and preferably before Budget Day on 16 Mar 2016.
Is there any alternative? Well perhaps yes! For those of you who are a director and shareholder of a UK limited company, get your company to invest in a pension, rather than do it yourself. All things being equal, your company will get tax relief at its company rate, and your personal income from the company can come down to match the contributions. That way, you’ll find that rather than funding your pension out of your own taxed income, you’ll have a lower income, a lower tax bill, and your company will have a lower tax bill too!