Budget 2024: Could Government Target Pension Tax Relief?

Retirees are scrambling to claim their 25% tax-free sums, and savers are racing to top up their pension funds. Why? Because speculation is mounting that the present Labour government will change the rules on pension tax relief.

Why are people making this speculation? Because the government has repeatedly stated that it will be making “painful” decisions in the upcoming autumn budget to raise revenue. These painful decisions could entail changes to the pension tax relief scheme that could hurt high earners.

How Might Upcoming Autumn Budget Changes Impact Pension Tax Reliefs?

Presently, savers can claim tax relief on their pension contributions up to an annual limit. This relief is refunded at the taxpayer's marginal rate: 20% for basic-rate taxpayers, 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.

Most individuals are eligible for tax relief on contributions up to £60,000 each tax year, known as the annual allowance. This amount includes both employee and employer contributions.

For those with annual taxable income above £260,000, the allowance reduces by £1 for every £2 earned over this threshold.

The maximum limit for tax relief for individuals without earnings is £3,600 per tax year, which also applies to children's pensions.

Furthermore, savers are entitled to withdraw 25% tax-free cash from their savings from age 55. The other 75% is liable for Income Tax.

Experts and laypeople worry that the government could reduce this to 20% or even eliminate it altogether. Rumours also abounded that the maximum tax-free amount of £268,275 that savers can take will also be slashed.

Another possibility is to remove higher and additional-rate tax relief and replace it with a flat rate of 25% or 30%.

Pensions are considered an easy target for governments to raise funds and close gaps. That is why it could be targeted to fill the £22 billion tax ‘black hole’ that Chancellor Rachel Reeves has mentioned on previous occasions. However, altering pension tax reliefs cannot happen immediately. It will take place gradually.

With this in mind, it might be wise to contribute extra to your pension before Budget Day if you have available funds.

What Are People Doing to Prepare?

To prepare, some investors are adopting “Bed and Individual Saving Account (ISA)” or “Bed and Pension” strategies before the budget is announced on 30 October. This involves selling investments outside of tax-efficient accounts and buying them back within those accounts. It protects gains from future tax hikes. These activities could help lock in current tax benefits and preserve future investment growth.

What Is the Experts' Advice?

Labour may reduce the 25% tax-free cash that pension savers can withdraw from age 55. It could be lowered to 20% or cut to the maximum amount.

But Experts warn against rushing to withdraw tax-free cash based on Budget rumours. It may limit future investment growth. According to experts' advice, careful planning, such as moving the money into a low-interest account or risking inheritance tax, could be detrimental in the long term. It might be helpful to talk to a financial advisor to make important decisions.

Conclusion

Pension tax relief changes are not the only changes in the coming Autumn budget. Many think a rise in Capital Gains Tax and Inheritance Tax is also on the cards.

However, in the case of pensions, people are taking steps to protect their pensions and investments ahead of potential changes in the upcoming autumn budget. It is important to think carefully and get professional advice before making significant financial decisions.