Pension: This group could lose their automatic tax relief under proposals

Pension saving is usually undertaken by Britons years in advance in preparation for their retirement. Putting money aside each year can help savings to build up over the course of an individual’s working life. And pension saving also has other benefits, designed to encourage Britons to save. 

READ MORE

  • State Pension age: ‘Backto60’ appeal case continues

Tax relief is perhaps one of the biggest incentives accessible by savers on a pension.

It means that money which would have otherwise gone straight into the government’s coffers as tax, is kept by the saver for their pension pot. 

Tax relief is not unlimited, but it can provide a welcome boost to pension saving for many people.

Current UK taxpayers can get tax relief on pension contributions of up to 100 percent of earnings, or a £40,000 annual allowance – whichever is lower. 

However, under new government proposals, the idea of pension tax relief is being changed, and it is likely to affect a certain group of pension savers first.

Millions of higher earners could lose out on the pension perk if the proposals go ahead.

At present, higher earners who are pension saving currently receive tax relief in their pay.

This ‘net pay’ method is given at the individual’s marginal rate – as they pay tax solely on a post-contribution salary.

DON’T MISS
Pension tax relief could be reviewed after concerns raised by MPs [ANALYSIS]
Pension warning: Women’s savings significantly drop during lockdown [INSIGHT]
Pension: Court ruling could boost public sector pensions by £6000 [UPDATE]

However, the method could be abolished entirely in an effort to create fairness in the pension system.

Each year, lower earners find they may not be able to receive such a tax boost on their individual pension savings. 

Changes, therefore, could move towards levelling out the system for savers.

The government and HMRC could instead switch to a ‘relief at source’ method, which would involve higher earners actively reclaiming the tax relief for their pension, above the basic rate.

READ MORE

  • Pension expert advises on ‘key steps’ to ensure comfortable retirement

Net pay pension schemes do not offer a tax top-up, whereas relief at source schemes do.

There are various proposals currently being considered by the government, so a path forward is, as of yet, unclear.

However, prompting from the government’s Public Accounts Committee (PAC), which has called for a review of the tax relief system, is likely to accelerate change. 

The PAC concluded the government did not understand whether the policy was effective, and thus further action needed to be taken.

Pension tax relief cost the government approximately £38billion in 2018/9, which has proven to be a sizeable strain on finances. 

The report from the PAC read: “The government has not made any assessment of whether that huge cost actually encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more.

“The data HMRC publishes on who receives pensions reliefs is limited and we are concerned that some groups are not benefiting from tax relief on their pension when they should.”

Now, the PAC has told the government it should be more transparent on the issue of tax relief and what needs to change.

Source: Read Full Article