The upcoming general election may spell the end for generous tax relief on contributions to private pension plans. As recently as a year ago, George Osborne, the chancellor of the exchequer at the time, was thought to favour scrapping up-front tax relief on pensions contribution altogether, with withdrawals from pension funds made tax-free instead. But Osborne backed away from the reforms amid a backlash from Conservative MPs and parts of the media – partly due to fear of alienating voters during the run-up to the EU referendum.
However, if a Conservative government is returned in June with a much-increased majority and a five-year term ahead of it, Philip Hammond, Osborne’s replacement, may be in a position to make bold changes. The £21bn annual cost of pensions tax relief is an enormously alluring pot of cash for any chancellor looking to plug holes in the public finances, and Hammond would not even need to dump tax relief altogether to make major savings. Currently, tax relief is given at savers’ highest marginal income-tax rate – 20%, 40%, or 45% – but the chancellor could choose to cap relief with a single flat rate for all. Setting the rate at, say, 30%, would allow Hammond to present the policy as a means of redistributing support from higher earners to the less well-off, while still netting a substantial windfall.
In that case, time may be running out for high earners to maximise pension contributions. Of course, it’s worth noting that the pensions industry is fond of using political uncertainty as a spur to encourage savers to increase their savings – and that previous warnings of a cull on tax relief have proved unfounded. Nevertheless, the current government does have a record of reducing pension tax breaks, having cut both the annual allowance and the lifetime allowance, so this is a threat savers should take seriously.
The risk of cuts to tax relief is at least a potential reform that savers can mitigate with careful planning. By contrast, it isn’t possible to protect your state benefits in the same way. The election is also expected to pose a threat to the “triple lock”, under which state pension benefits are guaranteed to rise each year by the higher of average earnings increases, inflation, or 2.5%. Labour has promised to keep the triple lock in place until 2025, but the Conservatives are yet to make their position clear. Hammond’s bruising experience over higher national insurance contributions is likely to have left him wary of binding the government’s hands with such guarantees.
Changes to pension age may be delayed
The early election may spell a tougher approach in some areas of pensions policy, but it could also restrict ministers’ ability to confirm aggressive plans for raising the age at which people can claim state pensions.
The government is currently working towards a 7 May deadline to respond to the report it commissioned from John Cridland, the former director-general of the Confederation of British Industry. The report recommended an increase in the pace at which the state pension age (SPA) is raised. Cridland’s report would not affect plans to move to a SPA of 67 by 2028, but would see a rise to 68 brought forward to 2039 from 2044. Other analyses have suggested an even earlier move is necessary, with the increase made by 2030.
However, the earlier the date the government goes for, the more voters will be affected. Cridland’s proposed timetable would affect everyone under the age of 46, while a change in 2030 would affect anyone now aged 54 or younger. The government will be nervous about a shift that catches large numbers of middle-aged voters, so it is possible that ministers will put off a decision until after the upcoming election.
In the news this week…
• The screws are tightening once again for buy-to-let investors this month, as the government starts to phase out long-standing tax relief on mortgage interest payments. To avoid losing out, increasing numbers of landlords are setting themselves up as limited companies, but this may not be such a good idea, warns James Pickford in the Financial Times. Firstly, if you try to move properties you currently own into a limited company, this is likely to be regarded as a sale and purchase by HMRC, which will trigger capital gains tax and stamp duty land tax (including a 3% surcharge). For those looking to buy new houses, funding a company-held purchase will be more expensive: the average fixed-rate loan is 4.45% for a limited company loan, compared with 3.35% for an individual.
Once the property is in there, getting money out of a limited company can be expensive. Most people will take money out as a dividend, but the tax-free allowance on dividends is due to fall from £5,000 to £2,000 in 2018. For anything above that, you will pay tax according to your income-tax rate – and the act of taking it might shift you into a higher income-tax band, wiping out any gains. So if you had incorporation in mind, “do the numbers” first.
• Controversial changes to probate fees, which in some instances represented an eye-popping 9,000% increase on the current charge, were “quietly shelved” last week, allegedly due to a “lack of parliamentary time” before the general election on
8 June, says Nina Montagu-Smith in The Sunday Times. Fees were due to rise next month, from a flat rate of £215 per estate, to a sliding scale that imposed charges ranging from zero for estates worth less than £50,000 to a maximum of £20,000 for estates worth more than £2m. The probate fee has to be paid before assets can be released from the estate, raising concerns that executors would be forced “to stump up the fee themselves”. Earlier this month a parliamentary committee said the proposed rises have the “hallmarks of taxes rather than fees” and were therefore “unlawful”. “Let’s hope it’s the last we hear of the fiasco,” says Laura Suter in The Daily Telegraph.