2021 Budget Changes To Pension Allowance - How Likely To Be Applied Retroactively to 20/21 Tax Year?

Franz1884

I have only very recently started to familiarise myself with Pensions, and I know that some of you have been following the topic for years. Thus, I kindly wanted to ask you the following:
I am a higher rate taxpayer and want to use this year to pay a lot of money into my pension (~100K gross) by using my unused allowance from the last couple of years. In other words, I want to contribute ~80K, get the ~20K added from my pension provider, and then reclaim the rest (~27K) when filing my 2020/21 personal tax statement in a couple of months.

Now I think that it is quite likely that Rishi will announce a change to the way pension payments are tax-advantaged (maybe taking down the 40K allowance, not allowing carryover of unused allowances, eliminating the tax refund for higher rate taxpayers all-together [e.g. 20% flat]). Assuming he does so in his budget on 11-March, would this normally work retroactively for the current tax year as well?
I am essentially afraid that I might now contribute ~80K to my SIPP, get the ~20K, and then in March hear that I would not be able to get the additional tax refund because they changed the rules. Do you guys think this is possible / likely?

If so I would consider contributing as much as possible through salary sacrifice now (thinking that then I am more likely to keep the full tax refund).

Thank you very much for your help!

Dazed_and_C0nfused

I guess in the current climate anything is possible but that seems an incredible amount of complexity to introduce. 

It might cost more to sort out the 2020:21 tax year than it saves in tax relief.

Where you are getting £27k from?  Are you caught by HICBC?

hugheskevi

Franz1884 said:

I am a higher rate taxpayer and want to use this year to pay a lot of money into my pension (~100K gross) by using my unused allowance from the last couple of years. In other words, I want to contribute ~80K, get the ~20K added from my pension provider, and then reclaim the rest (~27K) when filing my 2020/21 personal tax statement in a couple of months.

Few things to check:

(1) Are you affected by the tapered Annual Allowance in the current year, or the past years from which you plan to carry-forward unused allowance? Note that lower thresholds applied between 2016/17 - 2019/20 than in the current year.

(2) You have sufficient income in 2020/21 to be entitled to higher/additional rate relief on the whole of the contribution? So an income of £150,000+?

(3) As Dazed_and_C0nfused asks above, how is the £27K figure calculated exactly? Impact of a reduced Personal Allowance in conjunction with additional rate relief perhaps?

Franz1884 said:

Assuming he does so in his budget on 11-March, would this normally work retroactively for the current tax year as well?

It almost certainly wouldn't be retrospective. Depending on the nature of the change, there could be anti-forestalling measures taken to stop individuals increasing contributions from the date of announcement in advance of a change taking place.

Franz1884 said:

I am essentially afraid that I might now contribute ~80K to my SIPP, get the ~20K, and then in March hear that I would not be able to get the additional tax refund because they changed the rules. Do you guys think this is possible / likely?

I would think it extremely unlikely.

Franz1884

Thank you very much Dazed_and_C0nfused and hugheskevi. I highly appreciate your replies. Regarding the c.27K: I will make c.200K this tax year, so my regular tax bill should be ~75K. If I put 80K to my pension (net) I understand I get ~20K added on top, for 100K gross. I should then get a tax refund of ~27K through my personal tax return. Essentially my effective tax paid in the year would only be 75-20-27= ~28K (if I got that correct). In other words, my tax amount would be the same as if I had earned 100K. The number being so high is mostly driven by 'getting the tax-free allowacneback' [by pushing my effective salary to 100K]. Let me know in case you think I am getting something wrong. Thanks a lot. @hugheskevi, thanks a lot for your checks! Yes, I have >100K allowance from this + my previous 3 tax years (and not tapered). Thanks a lot for your comment that you think its unlikely and the note on the anti-forestalling measures! This is super helpful. I will then make sure to physically pay the money into my SIP before 11-March.

Dazed_and_C0nfused

Ok, that makes more sense.

As it is a relief at source contribution it doesn't reduce your taxable pay at all but will increase your basic rate tax band by £100k.

And it does reduce your adjusted net income however you need to factor in any other taxable income, for example if you had say £2,000 of dividends taxed at 0% you would still lose £1,000 of your Personal Allowance as your ANI would be £200k + £2k - £100k = £102k.

dunstonh

Now I think that it is quite likely that Rishi will announce a change to the way pension payments are tax-advantaged (maybe taking down the 40K allowance, not allowing carryover of unused allowances, eliminating the tax refund for higher rate taxpayers all-together [e.g. 20% flat]). Assuming he does so in his budget on 11-March, would this normally work retroactively for the current tax year as well?

Anything is possible but its rare and unlikely.

Changing HMRC systems, payroll systems provider systems etc cannot happen overnight on many things.  Direct debits will be in the works weeks in advance of being collected. Payroll systems already run for the weeks ahead.  It isn't feasible to change some things on a whim.   And with a March budget, it makes much more sense to do it from the new tax year.  even that would be tight on something as fundamental is removing higher rates of relief and moving to a single rate not linked to earnings.

Mick70

Nobody knows , anybody who says they do is lying .
two things that would be easiest to change is the LTA and the tax free lump sum , but again nobody knows , would they really make much difference to treasury ?  and changes would stop people putting away as much for pensions and just push people towards stock and shares ISAs where the govt would see no tax at all once drawn out,  also be an increase in the growing trend of buying property to let out   ,  all seems a bit pointless really ..IMO 
Most papers suggest any changes to taxation may well be postponed for couple of year ,  time will tell.

Dead_keen

Franz1884 said:

Assuming he does so in his budget on 11-March, would this normally work retroactively for the current tax year as well?

The Budget is on 3 March.
There is almost zero possibility of any rules changes applying before then.  So the tax consequences of making a contribution before 3 March would be unlikely to change.
I could quite easily see rule changes applying on or after 3 March.  Google "high income excess relief charge" if you wanted to see what happened last time the government thought about making significant changes to the pension regime.

atush

AFAIK, the gov has said they would not do any changes retrospective, and said they wont do w/o notice.

Not to mention, electoral suicide as nearly all of the voters who support the current gov would have some pension exposure

kinger101

Laws can be made to apply retrospectively, but it's extremely rare.  I'd say the chances of retroactive changes to the pension allowances are practically nil. 

Thrugelmir

Tax relief restricted to basic rate tax commencing April 2022. Change is going to fundamental. No tinkering around the edges.