Pension tax relief

Hamspring

Hi all.  First post.
If govt decides to remove higher rate tax relief on pension contributions from 40% to 20% in the budget; couple of questions.
1.  Will any change become effective immediately on budget day affecting current tax year, or become effective for tax year '20/'21?
2.  Will carry forward rules remain usable in order to pay extra into previous 3 tax years to utilise the 40% relief?
Any thoughts?

Dazed_and_C0nfused

1).  Only the Chancellor knows but I guess it would be incredibly complicated if the tax year had to split into two period?

2).  You cannot "pay extra into previous 3 tax years to utilise the 40% relief".  You can only get tax relief in the tax year that you make the contribution in.

CSL0183

I would say there’s a 99.9999999% probability that IF any changes are made to tax relief it will be from FY21/22 (or even further) 

To implement such a huge change just a few weeks after the budget would be negligent. It wouldn’t give Pension companies enough time to react, it wouldn’t give employers enough time to consult their employees. It would throw the NHS, Military and most of the public sector into chaos. Huge implications for DB schemes and there is massive complications regarding salary sacrifice schemes and employer contributions. (Would they be treated as a BIK and then  incur further taxes on employers contributions? If so, look at the knock on effect of things like £50k child benefit cap, Child maintenance, mortgage applications and so on and on) 

So no, in my opinion, not a hope in hell for FY20/21. 

I don’t think there will be any such changes other than to the LTA and AA, the resultant knock on effect of introducing flat rate needs extensive consultation with pension and tax experts and obviously the trade unions. If they hit NHS, Police, Fire, Military pensions hard again there will be widespread industrial action. Tories would likely lose the next election too, especially if they ended SS schemes for a flat 20% rate. This would punish millions of basic rate tax payers who currently enjoy 32/33% relief. 

Will we see something more radical? A tax giveaway that would indirectly curtail a lot of pension relief? He’s always said that HRT band is set too low with aspirations to increase to £80k. Increasing to £60/70/£80k is not as daft as it would first appear as when you factor in pension tax relief you get a whole load of that money back. However, he would have to do something at the lower end too to appease the lower paid. Perhaps copy Scotland’s 19% band and give a tax giveaway there.

Who knows what they have planned.  

Dazed_and_C0nfused

especially if they ended SS schemes for a flat 20% rate. This would punish millions of basic rate tax payers who currently enjoy 32/33% relief. 

This touches on a, as far as I know, as yet unresolved issue with moving to a flat rate.

The very nature of the net pay method means 40/41% tax relief is automatically received without the employer, taxpayer or HMRC needing to do anything but ensure the taxable pay value is correctly recorded when payroll is run.

How relief could be restricted to say 30% for someone earning enough to be paying 40/41% tax is a bit of a conundrum.

CSL0183

Dazed_and_C0nfused said:

especially if they ended SS schemes for a flat 20% rate. This would punish millions of basic rate tax payers who currently enjoy 32/33% relief. 

This touches on as as yet unresolved issue with moving to a flat rate.

The very nature of the net pay method means 40/41% tax relief is automatically received without the employer, taxpayer or HMRC needing to do anything but ensure the taxable pay value is correctly recorded when payroll is run.

How relief could be restricted to say 30% for someone earning enough to be paying 40/41% tax is a bit of a conundrum.

In order to stop the SS “loophole” they would surely have to treat employers contributions as a BIK and make that taxable? In turn the employees wage rises to incorporate the new BIK and the employee is then taxed on both their own contribution and their employers. Otherwise what’s to stop the employers SS contribution? Imagine that new BIK then pushed someone above the £50k child benefit limit and they lost that. 

It’s all one very big complicated puzzle. Hence why previous governments have never went near it. Complete minefield. 

Dazed_and_C0nfused

Complete minefield. 

Very true.

I suspect making people pay tax on pension contributions to make sure they got the correct tax relief would throw up some interesting threads on here 

Anonymous101

I also think that if they are to announce changes it'll be in at least 12 months time.
As others have described any changes would require some clear thinking through. The current Sal Sac schemes are especially troublesome. They would have to end IMO if any changes were made. If they simply taxed the higher rate at 20% through benefit in kind or some other mechanism then that would create a situation where a basic rate contribution would benefit by 32% relief (20% tax and 12% N.I.) where as a higher rate contribution would benefit 22% (20% tax and 2% N.I.). I suspect that wouldn't be acceptable.

BobQ

I cannot see them making a change in year - too complicated to implement
Who is to say that  carry over will not be curtailed or even abolished

crv1963

CSL0183 said:

Dazed_and_C0nfused said:

especially if they ended SS schemes for a flat 20% rate. This would punish millions of basic rate tax payers who currently enjoy 32/33% relief. 

This touches on as as yet unresolved issue with moving to a flat rate.

The very nature of the net pay method means 40/41% tax relief is automatically received without the employer, taxpayer or HMRC needing to do anything but ensure the taxable pay value is correctly recorded when payroll is run.

How relief could be restricted to say 30% for someone earning enough to be paying 40/41% tax is a bit of a conundrum.

In order to stop the SS “loophole” they would surely have to treat employers contributions as a BIK and make that taxable? In turn the employees wage rises to incorporate the new BIK and the employee is then taxed on both their own contribution and their employers. Otherwise what’s to stop the employers SS contribution? Imagine that new BIK then pushed someone above the £50k child benefit limit and they lost that. 

It’s all one very big complicated puzzle. Hence why previous governments have never went near it. Complete minefield. 

I don't think they could at a stroke treat employers contributions as a BIK, it would hit too many lower paid especially public sector staff and cause so much unrest/ negative publicity. They (all political colours) are trying to encourage pension saving, hence auto enrol. More likely a wide ranging consultation and review that will be kicked into the long grass as too complicated.

Albermarle

Maybe it will be something easy like reducing the AA to £25K . In reality this would probably hardly affect anyone earning less than £75K and maybe save a Billion or two .

Paul_Herring

Albermarle said:

Maybe it will be something easy like reducing the AA to £25K . In reality this would probably hardly affect anyone earning less than £75K and maybe save a Billion or two .

It would affect me massively; earning ~£55k and £40k going into pension. It would certainly mean I'd have to change my retirement plans if they dropped it that much.