George Osborne seems dead set on using the UK’s pension policy as a way to cut its outgoings, as we’ve noted on several previous occasions. It looks almost certain that the chancellor will end up cutting tax relief for higher-rate taxpayers at the next Budget in March. Now you can reclaim tax relief on pension contributions at your marginal income tax rate, but Osborne is expected to change tax relief to a single flat rate of between 25% and 33%, regardless of income. That’s “free” money for basic-rate taxpayers, but it renders pensions far less attractive for those paying 40% or 45% income tax.
Obviously, this means that if you’re a higher-rate taxpayer, you should be trying to put as much away in your pension as you can before the chancellor makes his move. It’s likely to take the government at least 12 months to push through these sorts of changes, but there’s no guarantee, so if you can act before the Budget, it’s probably better to do so.
However, as Nicole Blackmore points out in The Daily Telegraph, there are some circumstances where it might make more sense to pay into your spouse’s pension than your own – assuming that your spouse is a basic-rate or non-taxpayer, whereas you are likely to remain a higher-rate taxpayer when you retire.
Here’s how it works. If you’re a higher-rate taxpayer, a £100 pension contribution costs you £60 out of your own pocket. Let’s assume you then took that £100 out of your pension right away. You could take £25 out tax-free; and as a 40% taxpayer, you would pay £30 tax on the remaining £75. So you put in £60 and in the end you get £70. Now say that, instead, the same £100 goes into a basic-rate taxpayer’s account. They put in £80 to get £100. But when the pot is cashed in, assuming that their income falls within the personal allowance of £11,000 (from April this year), they’ll get the full £100 back. So they put in £80 to get out £100 – £10 more than the 40% taxpayer.
It’s a bit fiddly and rests on a fair few assumptions – that you’ll be a higher-rate taxpayer when you retire, for example, and that your spouse won’t pay any tax at all. And as Blackmore points out, there are risks – it helps to be happily married: “if the marriage breaks down, for example, disputes over the money could result”.
And, of course, you can’t put as much into a non-taxpayers’ pension as you can into your own – up to £2,880 (£3,600 after tax relief) each year. But it’s worth considering – if you invest the maximum amount into your spouse’s pension, you could end up with an additional £360-worth of tax relief a year, compared to putting the same amount into your own.