Pension changes ahead?

2024/2025 Pension Contributions

Rachel Reeves is expected to announce tax changes in the autumn because of her spending review. These changes are likely to be targeted at the upper end of the income scale rather than median earners or “working people” as Sir Keir Starmer has referred to them.

Pension relief is viewed by some in the Treasury as tax foregone by the government on earnings. The total cost of the relief is over £54 billion with much of it claimed by higher and additional rate payers – the rich, although many of those in the top 20% of earners will not consider themselves as such.

Rather than relief being given at the contributor’s marginal tax rate, there seems to be some attraction in Treasury circles for a flat rate of tax relief on contributions, perhaps set at 30%. If implemented this would represent a significant change in what may be termed the ‘pension contract’ where individuals and employers reduce current consumption to save for their own pension rather than burdening the state in the future.

Some are considering whether something might be done now before the rules perhaps become less generous and in advance of anti-forestalling measures which now routinely accompany last minute attempts to enjoy current rules before they are tightened.

Direction of travel on tax reliefs

At present, the ability to obtain income tax relief on personal pension contributions at up to your highest marginal rate (be that 40% or 45%) looks particularly attractive when compared to other allowances and given the current climate.

As a rule, pension contributions should be the priority for retirement savings as, after all tax relief, the net equivalent cost of £10,000 gross contribution is just £6,000 for most higher-rate taxpayers.

Depending on earnings the current rules provide an opportunity to potentially contribute up to £60,000 gross for the current year. With only one in seven higher rate earners becoming higher rate paying pensioners, the opportunity to take advantage of tax rates on a portion of one’s lifetime earnings can be significant. And that is before tax free cash withdrawals are considered.   

There is a window of opportunity which could get closed come the first Autumn statement of this new parliament.

What are the next steps?

The legislation relating to pensions and tax reliefs is complex and careful consideration should be given to your options. Seeking professional advice on this matter from your Crowe adviser before steps are taken is important.

However, using important annual contribution allowances merits serious consideration.