Generous pension tax relief is being cut for people earning more than £150,000, the Chancellor announced in his first Budget speech in a Conservative majority government.
The cut will pay for an increase to the amount people can pass onto their families without paying inheritance tax.
What is pension tax relief?
The government incentives saving into a pension by offering tax relief on your contributions. The amount of relief you get depends on how much income tax you pay:
- If you’re a basic-rate taxpayer, you get 20% tax relief.
- If you’re a higher-rate you get 40%
- If you’re an additional-rate taxpayer you get 45 %.
There are annual and lifetime limits on how much tax relief you get on your pension contributions. In the current tax year (2015/16) you can get tax relief on pension contributions of up to 100% of your earnings or the £40,000 annual allowance, whichever is lower.
The lifetime allowance is £1.25m at the moment and is dropping to £1m in April 2016. Deposits into your pension over these limits are subject to income tax at the highest rate you pay.
How pension tax relief is changing
For every £2 of income over £150,000, an individual’s allowance (currently £40,000) will be reduced by £1. Let’s look at how this works.
- If you earn £150,000, you can pay in a maximum of £40,000
- If you earn £160,000, you can pay in a maximum of £35,000
- If you earn £170,000, you can pay in a maximum of £30,000
- If you earn £180,000, you can pay in a maximum of £25,000
- If you earn £190,000, you can pay in a maximum of £20,000
- If you earn £200,000, you can pay in a maximum of £15,000
- If you earn £210,000, you can pay in a maximum of £10,000 – this falls no further
More radical changes to the pensions system
The Chancellor also announced his intention to encourage younger people to save into pensions. One idea is that pensions might be the equivalent of workplace Isas, with no tax relief paid on contributions but savings taken out tax-free when you retire. A consultation will look into this and other options.
The government is consulting on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother, including any excessive early exit penalties. Details of being able to sell your annuity will be announced in late 2015 with implementation in 2017.
Pension Wise, the government’s free and impartial pensions guidance service, is being extended to those aged 50 and the government is launching a comprehensive nationwide marketing campaign to further raise awareness of the service.
Pensions in the spotlight
Retirement saving and the prospect of taking the money more flexibly have very much been in the spotlight since the announcement of seismic pensions changes in the 2014 Budget.
Most of the new options came into effect in April 2015 and there’s now much greater flexibility in how we can access our retirement money.