Gary Smith, partner in Financial Planning and retirement specialist at UK wealth manager Evelyn Partners, looks at the benefits of pension saving in the changing tax environment.
In the universe of savings and investment options, ongoing tax changes are boosting the relative benefits of pension saving. The growing tax burden created by the freezing of income tax thresholds leaves the typical income earner with few options when it comes to mitigation, and one is pension contributions that take advantage of tax relief.
Workplace schemes are especially advantageous as they provide relief from National Insurance as well, and salary sacrifice schemes can also allow an employee to drop into a lower tax bracket.
The imminent halving of capital gains tax and dividend allowances to even lower levels in April, of £3,000 and £500 respectively, makes investing outside of tax-protected wrappers a tricky business tax-wise. Together with the lack of movement on the £20,000 ISA limit, and the lifting of LTA restrictions, this is likely to nudge more savers to put more of their money into private pensions – particularly older savers who are not too far from private pension access age.
The question is, with a possible change of government on the horizon, will this favourable status of pensions – particularly for higher and additional rate taxpayers – be allowed to continue indefinitely.
HM Revenue & Customs revealed recently that the cost of pensions tax relief continued to climb in 2022/23, with income tax relief increasing by £5.5billion over the past five years to reach £25.4billion. Tax relief on national insurance contributions to registered pension schemes had also grown, reaching £25.9billion in 2022/23, an £8.6billion increase over the past five years.
Part of this was down to auto-enrolment but there has also been a sort of ‘fiscal drag in reverse’ effect with wage growth pushing up pension contributions. Additionally, some workers have responded to the growing income tax burden by raising the percentage that they contribute to their pension each month.
The expense of this benefit to retirement savers has been a flashing light on the Treasury’s radar for some time and one wonders how much longer a future government can resist the temptation to crack down on pensions tax relief, at which point the higher rates would be particularly vulnerable.
