Don’t assume Reeves is finished plundering your cash – this pension tax break is next! B
There’s been endless speculation over how chancellor Rachel Reeves will attack our pensions in next week’s Budget. Yet one threat has been completely overlooked.
Where our pensions are concerned, Labour has declared war on all fronts with the notable exception of public sector pensions, which seem completely immune.
Reeves is likely to cap the most popular pension tax break of all, the ability to take 25% of our pots as a tax-free lump sum. That’s been written about extensively, including by me.
She also seems likely to slap inheritance tax on unused defined contribution pension schemes, even though they already incur income tax. I’ve written about this several times, too.
The Chancellor is also said to be targeting private sector company pensions, by making employers pay national insurance on contributions.
Companies are likely to cover the cost by cutting wages or paying the minimum possible into employee pensions, in what I reported yesterday as a “serious mistake”.
All of these tax raids have caused an outcry because they will cost pension savers a fortune if implemented. But one has barely been mentioned.
Yet I think it is the easiest and possibly the most likeliest to happen next Wednesday.
The only good news is there may be something you can do about it today.
Reeves appears to have ruled out cutting higher rate tax relief on pension contributions, but she has another card to pay. She could cut the pensions annual allowance instead.
Currently, any adult can contribute the equivalent of 100% of their earnings to a pension each year, up to a maximum of £60,000 a year.
Former Tory chancellor Jeremy Hunt increased that from £40,000 in March 2023. Reversing it would be easy as pie and bring two benefits for Reeves.
First, she’d save a bit of money which she could put towards plugging her £40billion black hole. Second, she could sell this as an attack on the rich.
Reeves could cut the annual allowance back to £40,000. She could even slash it to £30,000 or £20,000.
This won’t just hit those earning above those arbitrary levels. It will also hurt those with fluctuating earnings, such as sole traders, small business owners and anyone who earns commission and bonuses.
In some years they won’t have much income, and won’t be able to pay much into a pension. But in other years they could earn a lot more and use it to play catch up.
Many use the annual allowance to boost their pension in the run-up to retirement, when they may have more spare cash with the kids gone and mortgage cleared.
People who have been made redundant often put their severance into a pension, too.
That’ll all get harder if Reeves does curb the annual allowance. Worse, I fear a related pension tax break is also in her sights.
Under carry forward relief, pension savers can mop up any unused annual allowance from the previous three tax years.
Chris Boulet, partner at accountants Blick Rothenberg, said this is highly valuable. “It allows savers to maximise their income tax relief in years when they have greater earnings and higher rates of tax.”
He fears that Reeves could cut carry forward relief to just one year or even scrap it altogether.
Boulet said there is an obvious step to reduce the blow. “Anyone who has not maximised their pension contributions should consider doing so if eligible.”
That’s good advice for those worried about Labour’s tax raids. Claiming all the tax relief you can today may ease the pain of what’s heading our way.
To qualify for carry forward relief, you must have been an active member of a UK-registered pension scheme in the relevant year, and made sufficient earnings. You must use the current year’s annual allowance first.
As yet, we don’t know what Reeves will do. Nor do we know whether she will enforce changes immediately, or delay until the start of the new tax year on April 6, 2025.
Paying more money into a pension makes sense at any time, though. But especially today.
