Pension Contributions to be Cut for High Earners

Wed 08 Jul 2015

Pensions were once again prominent in the Budget with news that the Annual Allowance will undergo yet another revamp and that the future of pensions tax relief will come under the spotlight in a Government Green Paper.

From April 2016 the government will introduce a taper to the Annual Allowance for those with adjusted annual incomes, including their own and employer’s pension contributions, over £150,000.  For every £2 of adjusted income over £150,000, an individual’s Annual Allowance, the limit on the amount of tax relieved pension saving that can be made by an individual or their employer each year, will be reduced by £1, down to a minimum of £10,000.

Once again, high earners are being asked to carry the burden as these measures will largely fund new Inheritance tax reforms (see separate post). The new tapered allowance also creates a problem for the self employed and Directors whose income may fluctuate from year to year making it hard to judge if they trip the £150,000 barrier and therefore how much they can contribute to a pension.

For high earners, consideration should be given to maximising their pension funding now as the announcement creates a “buy now whilst stocks last” situation before the shutters come down in April 2016.

The Green Paper asks for views on the state of pension tax relief and states it is open to all views rather than putting forward a specific proposal. It has identified 8 key areas it is looking for responses to. These focus on the best way to incentivise pension saving and how simple, transparent and sustainable the current arrangements are. It’s hard not to come to the conclusion that the Government wants pensions to become more like ISAs, but with Government top ups as an added bonus.