Rumours are swirling that the new Chancellor Rachel Reeves will need to make some painful tax changes if she’s to balance the books at the forthcoming Budget at the end of October.
Even before the General Election, there was speculation that pension tax relief might be one of her targets. This was after old comments she had made supporting a flat rate of tax relief were unearthed in the press.
At the time Labour sources were quick to dismiss the rumours, saying such cuts weren’t current Labour policy.
However, since then Reeves has said she believes the nation’s finances are in a worse state than she thought, laying the ground for a tax squeeze.
Could Reeves change pension tax relief?
There are certainly savings to be made from tax relief tweaks.
Private pension stats show an estimated 56% of income tax relief was given at higher rate with an extra 7% at additional rate.
However, any move to trim such an important incentive to save for retirement would undoubtedly prove extremely unpopular.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Product and tax rules can change, and benefits depend on your circumstances.
What are Reeves’ options to change pension tax relief?
One option available to Reeves would be to cut pension tax relief to 20%.
This would be no change for basic-rate taxpayers. But it would be a huge reduction for higher and additional-rate taxpayers who receive 40% and 45% relief on their pension contributions.
A less painful option would be the implementation of a 30% rate across the board.
This would be great news for basic-rate taxpayers whose £100 pension contribution would only cost them £70 rather than £80.
However, this would still be bad news for higher and additional-rate taxpayers who are used to that £100 contribution only costing them £60 or even £55.
Right now, though, these are just rumours and there’s nothing to say the chancellor will prune back on tax relief on 30 October.
Whatever changes we see Reeves make, they need to be done as part of a holistic review that looks at the whole system rather than tinkering around the edges.
What can you do?
In the meantime, it’s important to make the most of all your pension allowances to build your financial resilience in retirement.
You can still get tax relief on pension contributions up to your annual allowance. This is £60,000 for most people, though it might be less if you’re a high earner, or have already flexibly accessed your pension.
Remember, you must be under age 75 to get tax relief. You’ll also only get tax relief on personal pension contributions up to 100% of your UK earnings, or £3,600 if this is greater (if you’re a low or non-earner).
It’s also important to remember pension carry forward.
This lets you use any unused allowances from the previous three tax years to really turbocharge your pension pot.
If you’ve not made any contributions in recent years, the carry forward rule could mean you can contribute up to £200,000 to your pension.
Remember, you normally need to be at least 55 (57 from 2028) before you can access money in your pension, when up to 25% is usually tax free with the rest taxable.
How long will my pension last?
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