Tax allowance changes announced by Chancellor of the Exchequer Kwasi Kwarteng in Friday’s ‘mini’-Budget, including the abolition of the additional rate income tax, while welcomed by those earning over £150,000, also comes with a sting in the tail for personal pension contributions, according to Aegon.
Steven Cameron, pensions director at Aegon, said: “A contribution of £550 out of take-home pay becomes £1,000 when invested in a pension. In future, the highest marginal rate will be 40% so the same £1,000 in a pension will cost £600 from take-home pay. Those in a position to do so may want to make additional pension contributions before April 2023 to make sure they benefit from the maximum tax relief.”
Reducing the basic rate of income tax will cost the Treasury around £5bn a year, while scrapping the additional rate of tax will cost about £2bn, “both hugely significant tax cuts,” said Andrew Tully, technical director at Canada Life.
“There is a pension planning opportunity for those who can afford to make pension contributions in the current tax year. Additional rate taxpayers will get 45% relief, whereas next year contributions will only receive 40% relief. Similarly, basic rate taxpayers can obtain 20% relief on contributions this year, which will fall to 19% next year.”
Alastair Black pointed to the removal of the additional rate tax band, along with the confirmation of the removal of taper relief on corporate tax, as positive steps forward in terms of simplifying the tax regime – “something that will be welcome to advisers and their clients alike”.
He added: “The Chancellor said the government wanted to carry out further simplification and we hope that it now takes the opportunity to address, in particular, overly complex pension tax features that are a barrier to clients investing and saving for the future such as the reform of the lifetime annual allowance and the money purchase annual allowance.
“What’s certain is that all of this change will, once again, be a significant opportunity for advisers to showcase their value – providing insight and guidance to help clients understand what it means for their money.”
Andrew Megson, executive chairman of My Pension Expert, said: “Pension policy has largely gone unmentioned. Perhaps not surprising, particularly as the UK’s pension minister was only appointed on Wednesday. However, it is vital that the new-look DWP hit the ground running and address the most pressing issues facing pension planners.”
Fast-tracking the pension dashboards programme should be a priority for the Government, he urged. “It would give pension planners greater insight into and control over their retirement savings. Moreover, the Government must commit to working with the pension sector to champion the role of education and improve access to independent financial advice. Doing so will ultimately enable savers to develop a strong retirement plan, tailored to their specific needs.”
[Main image: kate-krivanec-moW-dSe5CiU-unsplash]
