Big earners stuffing pension contributions as Budget pension cuts loom

The Telegraph has today reported that savers appear to be making a ‘last-minute dash’ to top up pension savings as fears grow that Chancellor Philip Hammond will cut the generous tax perks afforded to pensions.

They report that cash flowing into pension accounts run by Zurich, the insurer, doubled in September, compared to the average. One-off contributions soared 161pc as savers stashed away larger amounts than normal.  Employees can currently save up to £40,000 a year via their pension and benefit from “tax relief”.

Rumours about a pension cut in the Autumn Budget have been circulating for some time.   The Chancellor’s speech at the annual IMF meeting in Bali earlier this month did little to quell fears, after Philip Hammond described the tax breaks offered to retirement savers as “eye wateringly expensive”.

Overall, pensions tax relief is expensive for the Treasury (a net of cost of £25,100m in 2016/17 according to HMRC).  The current rules are also often criticised because pension savers get tax relief on pensions contributions equivalent to the rate of income tax they pay. This means it costs basic rate taxpayers £80 to save £100, while higher rate payers only have to stump up £60 to save the same amount.   It is possible that the Chancellor could  reduce this cost substantially either by scrapping higher rate tax relief or introducing a new flat rate, however this is not what pundits are expecting

Tom McPhail, head of policy at Hargreaves Lansdown ponders on a change to the annual allowance taper.

Reported by Moneywise, the introduction of the taper allowance in April 2016 means that anyone with a taxable income over £150,000 sees their annual allowance reduced by £1 for every £2 earned over that threshold.

Mr McPhail says targeting this could be an easy win for the Chancellor.

“By design this is targeted at higher earners, effectively it only applies to those with incomes over £150,000. The Chancellor could cut this to perhaps £125,000 and there would be little sympathy for the hundreds of thousands affected by it. Easy to do, politically attractive, it wouldn’t raise a huge amount but it would still be useful.”

He adds: “As an alternative, the taper could be applied more aggressively; currently the annual allowance is removed at a rate of £1 of allowance for every £2 earned, meaning the allowance is reduced to its minimum of £10,000 once someone’s income exceeds £210,000. This could be tweaked, for example so it applies at a rate of £2 lost for every £3 earned.”