By Chas Roy-Chowdhury, head of tax, ACCA
Today is the deadline for responses to the Government's consultation on its plans to change the taxation on pensions. This is the second time the plans have been consulted on – the first consultation didn't exactly receive a positive response, with the summary of responses unable to quote a single supportive submission…
The current – admittedly convoluted and compliance-burden heavy – system sees tax relief restrictions set at 20% on pension contributions, and is aimed at those earning over £130,000.
The proposed changes would see a massive reduction of the tax efficient annual allowance (AA) from £255,000 to between £30,000 and £45,000. If the AA is set towards the £45,000 mark, then those earning well below the £130,000 figure – as 'low' as those earning £40,000 – could be caught up in the changes, especially if they're making Additional Voluntary Contributions.
The £40,000 figure is based on the way the Government plans to value contributions: a 'flat factor', which could be as much as 20, would be used to multiply any increased pension entitlement accrued during the course of the year. Higher than usual income increases e.g. due to promotions, could trigger a tax charge.
Now, those earning £40,000 are hardly up against it – far from it – but it seems odd to now include them in a tax previously aimed at only those earning almost £100,000 a year more.
For a family of four on £40,000, increased tax payments on pension contributions will probably be adding to mortgage repayments, utility bills, and living costs. Making saving for retirement more expensive might put otherwise responsible savers off doing so.
If increasing personal responsibility is one of the aims guiding this government, then a policy that could discourage people from taking responsibility for their future seems a little counterintuitive.
The budget deficit means the Government are – understandably – on the look out for revenue raising schemes; this is one of them. But there are less drastic, ones-size-fits-all ways of making the changes. We've argued for not bringing past accruals into the calculations, or using a lower allowance for those just starting out in work, and a larger one for those over, say, 50.
Yes, public finances are tight, and, yes, 'we're all in this together', but the proposed policy will result in only a little short-term gain for a lot of long-term pain. Hopefully the Government will take some of the consultation comments on board this time.