Flat rate tax relief for pensions?

The rules on pensions seem to be forever changing but one thing the government say they want to do is reduce complexity.It is also clear that they want to avoid high earners from being the main beneficiaries of the current generous tax reliefs when contributing to pensions. Currently most of the benefit of any tax relief is given to the top 10% of high earners.

Under existing rules those paying tax at 40% and 45% attract tax relief at those higher rates on a contribution made. A 45% tax payer could transfer £10,000 into his pension at a cost to him of only £5,500 (£2,000 added to his pension by the government and £2,500 given as higher rate tax relief).

In order to level the playing field and to encourage those basic rate taxpayers to save within their pension, it is rumoured that the government will remove higher rate tax relief and instead introduce a flat rate relief. This is expected to offer tax relief on the contribution made within the range of 25% – 33%. The quantum of the flat rate relief is uncertain but the change may be brought in on Budget Day on 16 March 2016.

It is therefore important for clients to liaise with their usual pension adviser to consider whether to make a pension contribution before this date to maximise the reliefs available.

 

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