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Why you should consider your pension contributions now

“The general Government gross debt was £1.763 billion at the end of the financial year ending March 2018. This is equivalent to 85.8% of gross domestic product (GDP) and 25.8% points above the reference value of 60% set out in the Protocol on the Excessive Debt Procedure”.

(Office for National Statistics)

What the above statement really says is that the Government needs more savings to meet their remit of debt reduction and is looking for ways to achieve this. This then leads me on to an area that seems to be continually ‘hard hit’, namely the UK pensions market.

Government tax relief given on pension contributions amounts to £38 billion (2016/17) and is likely to increase substantially as the auto-enrolment contributions by both employer and employee increase. A large percentage of this tax relief goes to higher and additional rates taxpayers who are thought of as ‘fair game’ when considering cost savings. To be candid, the Government can afford to upset high earners on the basis that these represent a comparatively small percentage of the population in favour of appeasing those on basic rate earnings by perhaps offering an additional incentive. For example, the Government could restrict tax relief on pension contributions to say 25% across the board, thus reducing the overall expenditure. This would also improve the majority of pension savers values by increasing their tax relief on contributions from 20% to 25%.

When could this happen?...Chancellor Philip Hammond undoubtedly has this in his sights as a possible cost saving measure and whether this happens in the current tax year is a matter of debate. The Autumn Budget is due in November and if introduced, could come into effect straightaway to avoid a rush in contributions. I therefore seriously recommend that higher rate taxpayers consider additional pension contributions, not only for the current tax year, but also for the 3 previous tax years by the use of ‘carry forward’. In effect, making use of this tax relief before it potentially goes.

Examples of other areas by which the Government could save or collect tax include reducing or stopping the tax-free cash entitlement on pensions, currently set at 25%. Also, they could lower the Annual Allowance figure (the amount that individuals can contribute to pensions annually) by reducing the current threshold of £150,000, whereby a Tapered Annual Allowance can apply, to perhaps £100,000. Either way, pensions look like a soft target for the Government. If you would like to discuss how this could affect you please do not hesitate to contact Terry Bergum here or on +44 (0)330 124 1399.

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