Before the March 2016 Budget there had been much speculation that the Chancellor was planning big changes to the tax relief on pensions. However, just before the Budget, the Treasury scotched rumours of such changes and subsequently there were no changes to pension savings tax relief in the forecast Budget.
But then came the ‘Black Hole’ when the opposition to proposed welfare savings, particularly in the disability benefits area, spearheaded by Iain Duncan-Smith’s resignation, derailed the Chancellor’s fiscal plans. The connections were easily made between his proposed higher rate income tax reductions for the rich and the benefit cuts for the less well-off, clearly unpalatable to many in the House of Commons. So there was a U-turn on welfare benefit cuts, even going so far as a promise of no more raids on welfare benefits in this parliament.
So where can the Chancellor look for cash to fill the Black Hole, to get his fiscal policy back on track? Earlier this year, a lot was being said about pensions savings tax relief being unfair, favouring higher rate taxpayers and therefore making this a legitimate target. This was ignored by the Chancellor in the Budget, though, prompting many commentators to suggest that the coming EU Referendum and the need for the Government to keep Conservative EU membership supporters happy and not antagonise the ‘Brexiters’ on the Tory back benches was a priority, at least until 23rd June!
Currently, when savers pay into a pensions scheme their contributions are boosted by tax relief at the rate they pay on their earnings, which can be as much as 45%, and figures from the government show that more than two-thirds of the current £34 billion pensions tax relief goes to higher rate – 40% and 45% rate taxpayers. Such a distribution is widely perceived to be unfair and by many observers, ineffective in encouraging people to save.
After the Referendum, changes to pension savings tax relief could soon come. After all, having the Budget put comparatively more money into the pockets of the rich (according to the Institute of Fiscal Studies), it would then be politically timely and expedient to take all of that, or at least some of it, back in the formulation of a ‘fairer’ pension savings tax relief set of arrangements.
If we stay in the EU, the weighted pension savings tax incentive for higher rate taxpayers will have served its purpose, as will the little extra tax relief money in their pockets, so we can restore the balance, helping the less well off in society. Even if the Brexiters win, the money can still be taken back, perhaps with a convenient political justification that our impending exit has brought about the change.