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One that got away

09 December 2014

Chancellor George Osborne’s pre-Christmas ‘mini-Budget’ contained some good news for Britain’s savers and investors – and for the pension arrangements of high earners too.

Although the Autumn Statement did not bring the great tax giveaways of the March Budget, Chancellor George Osborne’s pre-Christmas package did offer an early dose of seasonal cheer to Britain’s savers and investors. For those of us buying a home with a value up to £1 million, investing in Individual Savings Accounts (ISAs) or benefitting from pension annuities, the early December ‘mini-Budget’ brought some welcome reforms. And, as the last opportunity for the government to make significant policy announcements before the general election, the Autumn Statement contained enough in the way of gifts to create a warm glow among voters, without underplaying the stark reality that Britain is only half way through its chilly era of austerity.

There was one notable omission from last week’s announcement, however, in the shape of the future direction of tax relief for pension contributions. For now, the system first brought to the UK in 1921, remains in place. Some politicians had been calling for a flat rate, or cap, on higher rates of tax relief to bring much needed savings to the Exchequer as it pursues its austerity policy to tackle the nation’s budget deficit by the end of the next parliament. Indeed, scrapping higher-rate tax relief would have been a convenient way to pay for the tax breaks introduced elsewhere. For higher earners, the lack of action may well be a case of ‘no news is good news’.

The decision not to further interfere with pensions, however, is no great surprise considering the scale of reform already announced this year. To squeeze in another policy change before the general election may have proved a touch ambitious. However, the Chancellor did announce that there will be “substantial savings” in public spending if the Conservatives continue in government after May. There’s nothing new in that statement, but the question remains whether or not higher-rate tax relief for pension contributions will survive the next round of spending cuts.

Tax relief continues to be a considerable advantage to the millions building a fund for retirement. At the moment, the government automatically tops up pension contributions with tax relief at 20% - so a £100 contribution only needs the individual to put in £80. But relief rises to 40% for higher rate tax payers and 45% for those who pay income tax at the additional rate. However, Ian Price, Divisional Director at St. James’s Place, warns that pension savers should not take the present system for granted. “Clearly, we don’t know what the government will do in future,” says Price. “There’s a great deal of uncertainty over whether the current system will be revised.”

For now, people can fund pension savings up to the annual allowance, which is the maximum anyone is allowed to invest into pension savings in a single year and still claim tax relief. The annual allowance is currently set as the total of all of an individual’s earnings, or £40,000, whichever figure is lowest.  Any unused annual allowance can be carried forward, but only from the previous three tax years, so any allowance left over from the 2011/12 tax year must be used before 5 April 2015.

But, where there is uncertainty, the best course of action is often to take advantage of the rules while the opportunity is still available, Price comments. “Those looking to make the most of tax relief currently available might consider increasing their pension funding levels now rather than waiting until later,” he adds. “By waiting they risk the chance of tax relief being cut at a future date.”

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

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